Speaker 1: Is your money safe? You may have been wondering about
Speaker 1: your deposits after a series of bank runs in the
Speaker 1: US and the emergency rescue of credit suisse. So what
Speaker 1: do you need to know about this crisis? That's been
Speaker 1: unfolding in the banking sector? I'm Jonathan Piris from the
Speaker 1: money mind team. And my guests today are Samuel, re
Speaker 1: chairman and chief investment officer of fintech startup in DAAs
Speaker 1: and lien, chief investment strategist of lion global investors.
Speaker 1: Now guys, let's start with the two major episodes in
Speaker 1: the past weeks, the bailout of credit suisse and the
Speaker 1: bank runs in the US. Samuel. Are we in a
Speaker 1: global banking crisis?
Speaker 2: Yeah, we are in a kind of a mini banking crisis.
Speaker 2: I wouldn't call it a full blown banking crisis. What
Speaker 2: we've experienced in the US and what we experienced, the
Speaker 2: creditors are very fundamentally different things. So in the US,
Speaker 2: it's because the fixed income market has created a loss.
Speaker 2: There's a mismatch of asset and liability
Speaker 2: for the banks had a run on their deposits, any
Speaker 2: bank at any point in time, if they have a
Speaker 2: massive run where depositors ask for all of their money back.
Speaker 2: There's no bank that will survive. What that results in
Speaker 2: is the flight to quality that we are seeing. So
Speaker 2: the money that people are fearful of not getting back
Speaker 2: unless the government guarantees it, they will fly to the
Speaker 2: quality and bigger banks like Chase or Bank of America
Speaker 2: where they have seen massive inflows of deposits which makes
Speaker 2: them even stronger.
Speaker 2: That's I think very different from credit suisse where I
Speaker 2: think credit suisse was really a result of risk management,
Speaker 2: not really being there. Credit Suisse is traditionally known as
Speaker 2: a bigger risk taker than its competitor like U BS.
Speaker 2: If you take those risks, then you blow up, then
Speaker 2: you're going to face the consequences of that. Credit Suisse
Speaker 2: was a very company specific problem that was exacerbated by
Speaker 2: a crisis of confidence. And so when there's a crisis
Speaker 2: of confidence in financial markets, they attack the weakest link
Speaker 2: and in Europe, that was credit Suse
Speaker 1: le me. And do you agree not at this moment,
Speaker 1: the current issues that we face in the States or in,
Speaker 1: in crisis, these are unique issues that are present at
Speaker 1: the banks themselves. After 2008, the global financial crisis, banks
Speaker 1: are now very well capitalized and fairly well regulated. Second
Speaker 1: thing this time around the regulators have come in very
Speaker 1: quickly to address the issues with confidence. So if you
Speaker 1: look at the US
Speaker 1: financial regulators, they have come in with two policies, one
Speaker 1: which is they have in a way assured that the
Speaker 1: uninsured deposits at Central bank and also at Silicon Valley
Speaker 1: Bank will be made whole. What this means is that
Speaker 1: banks that are larger than central bank or S V B,
Speaker 1: your deposits will definitely be safe, you know, in a
Speaker 1: way that's an implicit guarantee. Secondly, the regulators will also
Speaker 1: come in to help out with the liquidity of the
Speaker 1: banks themselves.
Speaker 1: For Silicon Valley Bank, when depositors flee, they are forced
Speaker 1: to sell their portfolio of bonds by doing so, they
Speaker 1: realize losses. But in this case, what the regulators allow
Speaker 1: is that the banks could now pledge their assets to
Speaker 1: the government on par, meaning there's no haircut so that
Speaker 1: resolves the liquidity issue at the banks. So the really
Speaker 1: quick actions by the central bankers and the regulators have
Speaker 1: actually addressed the confidence issue. So we think
Speaker 1: that by coming in very quickly to resolve the issues,
Speaker 1: the risk of contagion or systemic risk that could lead
Speaker 1: to a banking crisis, that rate is very low now.
Speaker 1: So what kind of an impact will there be on
Speaker 1: the global economy? Samuel?
Speaker 2: The global economy was already slowing whether it was because
Speaker 2: of China because of COVID and the US because of
Speaker 2: the interest rate policies. But whether we enter a recession
Speaker 2: or not, I think is debatable because global recession is questionable.
Speaker 2: The market is expecting a US recession during the course
Speaker 2: of this year or
Speaker 2: beginning of next year. But we think that it will
Speaker 2: be probably a mild recession, it won't be a steep
Speaker 2: recession and it will be a recession marked by very
Speaker 2: peculiar factors like unemployment remaining relatively low, the consumer balance
Speaker 2: sheet remaining relatively healthy, but the probability of a recession
Speaker 2: is very real.
Speaker 1: I think these are issues that are unique to the
Speaker 1: banks themselves and not representative of the general situation. So
Speaker 1: I really don't think that we are in a crisis mode.
Speaker 1: That's it, there could actually be an indirect impact on
Speaker 1: the economy itself even before the
Speaker 1: issues at signature bank or at the S V B
Speaker 1: or credit suisse consensus numbers is already expecting Europe to
Speaker 1: have a contraction, economic contraction for 2023. And for us
Speaker 1: to probably be flat, maybe 0% to 1% GDP growth rate.
Speaker 1: So with this issue itself, you could actually expect the
Speaker 1: lending rates to be tightened, meaning there will be less
Speaker 1: credit in the system itself and that could actually drag
Speaker 1: on the economic growth rate. So I would say that
Speaker 1: there's a fair chance that we could see a economic
Speaker 1: contraction for the developed markets in this year.
Speaker 1: But that's it. For Asia is a different story altogether
Speaker 1: because for Asia, you have the counter cyclical growth of China,
Speaker 1: the Chinese government is very committed to the 5% GDP
Speaker 1: growth target that they have set March of this year
Speaker 1: and they are just opening up after three years of lockdown.
Speaker 1: So our expectation is that the
Speaker 1: the opening of China would also have a carry-on impact
Speaker 1: a boost to the economy in Asia. So for example,
Speaker 1: if you look at Singapore, I think M E s
Speaker 1: has projected a GDP growth rate of around 0.5-2.5%, which
Speaker 1: is still a fairly healthy range. So you shouldn't look
Speaker 1: at things in totality, developed markets like us and and
Speaker 1: Europe probably runs a risk of a recession maybe end
Speaker 1: of this year or next year. But for Asia, the
Speaker 1: risk of that is fairly low.
Speaker 1: So within this landscape, how should investors be positioned to
Speaker 1: navigate the road ahead?
Speaker 2: One of the biggest lessons that we can learn from
Speaker 2: the whole experience and this cycle is that we really
Speaker 2: should take more advantage of the benefits of diversification.
Speaker 2: So that could mean that you diversify across different banks
Speaker 2: for your deposits or diversify into money market funds or
Speaker 2: cash management solutions that are attractive. The other diversification is
Speaker 2: that you don't just place your money in deposits but
Speaker 2: invest in maybe fixed income because fixed income is quite
Speaker 2: attractive right now.
Speaker 2: And then if you're looking at financial investments in financial
Speaker 2: markets and not investing in a single company or a
Speaker 2: single country or a single sector, but really trying to
Speaker 2: be more diversified across global markets so that you know,
Speaker 2: you have one blow up Silicon Valley Bank
Speaker 2: if you're a passive global investor, then it wouldn't have
Speaker 2: made even a dent, even credit suisse wouldn't have made
Speaker 2: a dent. But if you just invested in European banks
Speaker 2: or if you invested in US banks, or if you
Speaker 2: invested in a single stock like Silicon Valley or credit suisse,
Speaker 2: you would have lost a lot of money and lost
Speaker 2: a lot of money to a degree where you may
Speaker 2: not be able to recover. Whereas diversification allows you to
Speaker 2: take those losses and still be able to continue to
Speaker 2: compound your returns over time.
Speaker 2: Because the market naturally does what it does, which is
Speaker 2: it sees out the bad players and overweight those companies
Speaker 2: that are delivering and growing and a higher quality. So
Speaker 2: being exposed to market and generating that beta return is
Speaker 2: still an attractive proposition for an individual who's saving for
Speaker 2: the long term and trying to compound their wealth over
Speaker 2: the long
Speaker 1: term. I think for all investors, one thing that you
Speaker 1: have to remember is diversification.
Speaker 1: So especially in this environment, cash is also king. So
Speaker 1: I think investors will do well if they remember these
Speaker 1: broad guidelines, meaning you should have a certain amount of
Speaker 1: your money in cash, cash equivalent, you could consider even
Speaker 1: the T bills that the Singapore government is issuing. Second
Speaker 1: thing to have equities. So within equities, you could actually
Speaker 1: look at both growth and also quality.
Speaker 1: And lastly in case there's a recession, you should actually
Speaker 1: have also investment grade bonds. Because when you do have
Speaker 1: a significant economic slowdown, central banks would likely cut interest
Speaker 1: rates and that will be positive for bond prices. So
Speaker 1: the key is basically to have a diversified portfolio. So
Speaker 1: you could have some cash, some equities for equity should
Speaker 1: be quality and some growth in it. And lastly, you
Speaker 1: should actually have bonds also
Speaker 1: a quick recap of what we've talked about. So far,
Speaker 1: the issues appear to be specific to the banks themselves
Speaker 1: and not representative of the larger financial system. But there
Speaker 1: could be knock on effects as banks tighten lending standards,
Speaker 1: this will make loans harder to get and more costly.
Speaker 1: If you're investing both Samuel and lien suggest having money
Speaker 1: in different banks as well as different financial products and markets.
Speaker 1: So the big question is our money safe in banks,
Speaker 1: I would think so after 2008, most of the banks
Speaker 1: are actually regulated properly for the large banks. There's this
Speaker 1: extra capital requirements stipulated by Bale three and most of
Speaker 1: the banks are in compliance with Bale three especially in Singapore.
Speaker 1: So you're referring there to battle three, a set of
Speaker 1: international banking reforms introduced following the 2008 global financial crisis
Speaker 1: to improve regulation and promote stability in the international financial system.
Speaker 1: Yeah, well, banks these days are very well capitalized and secondly,
Speaker 1: there's ample regulatory oversight at the banks. So we feel
Speaker 1: that the banks are basically safe as a start. There's
Speaker 1: this insurance scheme over here in Singapore. So up to
Speaker 1: $75,000 per person would actually be insured at the banks
Speaker 1: in Singapore in the States. It is around 250,000. So
Speaker 1: there's a little bit of disparity over there, but you
Speaker 1: are sure at least for $75,000 that you will be
Speaker 1: insured
Speaker 1: the banks over here in Singapore, regardless of whether it's
Speaker 1: a local bank or it's a foreign bank, the regulations
Speaker 1: actually applies to them. So we are confident that the
Speaker 1: banks in Singapore are basically safe.
Speaker 2: Well, the Singapore government also only insures up to $75,000.
Speaker 2: And so if there is a bank run on a bank,
Speaker 2: then obviously that's still a risk. I think generally the
Speaker 2: banks are safe. But in the US, for example, money
Speaker 2: market funds have become very popular and we saw a
Speaker 2: big inflow into money market funds which are day to
Speaker 2: day matched dollar for dollar. So the asset liability mismatch
Speaker 2: that is fundamental to the bank's balance sheet
Speaker 2: because you borrow from depositors in short term money that
Speaker 2: people can take out at any time without a gate.
Speaker 2: But you lend that money to mortgages and companies that
Speaker 2: you can't pull immediately or they are invested in investments
Speaker 2: that often lose money and you can't get out immediately
Speaker 2: and repay the depositors that fundamental mismatch is still there
Speaker 2: for every single bank.
Speaker 2: So if you're worried about that, then you know, maybe
Speaker 2: the money market fund is a good alternative for you
Speaker 2: to invest in because money market funds obviously are mark
Speaker 2: to market every day has daily liquidity, no lock up.
Speaker 2: Um So those are um you know, attractive like liquidity
Speaker 2: management, cash management solutions and they represent almost 20% of
Speaker 2: bank deposits in the US. So it's a very popular
Speaker 2: common way to manage your liquidity if you're concerned about
Speaker 2: bank deposits. What
Speaker 1: is one key lesson to be learned from this episode
Speaker 1: of bank shutdowns?
Speaker 2: I think the lesson from credit suisse is that obviously
Speaker 2: you need to do your homework when it comes to
Speaker 2: investing in these banks and companies because it may look
Speaker 2: the same, but each bank is managed differently. They have
Speaker 2: exposure to different segments of the financial service business at
Speaker 2: different points in the cycle. They will do better or worse.
Speaker 2: And so I think credit suisse is all about mismanagement
Speaker 2: and
Speaker 2: a lack of risk control, risk, risk management and controls.
Speaker 2: Whereas the US is very different. I think us the
Speaker 2: biggest lesson that we can learn is that we should
Speaker 2: actually diversify our risk, whether it's deposits at banks or
Speaker 2: investments in financial markets. There is great benefits to be
Speaker 2: had from diversification. The guy who invented diversification won a
Speaker 2: Nobel Prize
Speaker 2: for a reason.
Speaker 1: The regulators could also consider new K P I S
Speaker 1: to look at banks. So for example, one thing that
Speaker 1: we learned this time around was that not only the
Speaker 1: capital structure is important, but the depositor base is also
Speaker 1: the makeup of the depositor base is also very important.
Speaker 1: So for banks with very narrow depositor base and where
Speaker 1: the depositor base is not sticky, I guess regulators may
Speaker 1: see that as a great flag
Speaker 1: by and large, I don't think there will be major
Speaker 1: changes to the regulatory framework, but I think that there
Speaker 1: could actually be additional conditions that regulators will look at
Speaker 1: a lot to consider this episode, teaching us to look
Speaker 1: at the depositor base of banks, not just the capital structure.
Speaker 1: The banking crisis also put the spotlight on the importance
Speaker 1: of risk management and the need for companies to have
Speaker 1: a risk and compliance culture.
Speaker 1: But the issues appear to be specific to these banks
Speaker 1: themselves and not representative of the larger financial system. The
Speaker 1: bank failures have raised concerns among customers about their deposits
Speaker 1: in Singapore funds up to $75,000 are covered by deposit
Speaker 1: insurance but the banking turmoil could hit our pockets as
Speaker 1: banks tighten lending, it will make it more expensive to
Speaker 1: take out loans. It's also heightened fears of recession.
Speaker 1: It's more important than ever to have a diversified portfolio
Speaker 1: and that means different banks sectors and markets. You should
Speaker 1: also aim for a mix of cash or cash equivalents,
Speaker 1: equities and bonds and that's the five things you need
Speaker 1: to know about the ongoing banking crisis. My guests were Samuel,
Speaker 1: re chairman and chief investment officer of fintech startup and
Speaker 1: and lien chief investment strategist of lion. Global investors
Speaker 1: catch money Mind on C N A and online at me,
Speaker 1: watch C N A dot Asia and youtube.