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SVB collapse not a Bear Stearns moment, it’s more of an IL&FS moment, says Mark Matthews

The chief of investment research adds that US CPI may come down to 5.3 percent in March; expects Fed rate cut in second half of 2023

March 16, 2023 / 11:45 AM IST

Mark Matthews, head of investment research at Bank Julius Baer, believes that big lenders will stand to benefit from Silicon Valley Bank (SVB) collapse as deposits will move from smaller banks to the bigger ones. Fears of contagion or a 2008-like crisis may be overstated even if more skeletons tumble out of closets in the aftermath of the SVB meltdown.

In an interview with Moneycontrol, Matthews said there is no need to panic because all deposits, even those above $250,000, have been guaranteed, which was not the case with Bear Stearns back in 2008. He also said that it remains to be seen whether the US Federal Reserve will take its foot off the pedal when it comes to its fight against inflation but the odds of a 500basis point rate hike next week are low and that he is factoring in a 25-basis point hike this time around. He expects the Fed to start cutting rates in the second half of the current year.

Also Read: The SVB saga: A simple explainer

Here are the edited excerpts of the conversation.

Let me first ask you about the Fed’s rate trajectory forward, given the fact that a lot has changed since Friday. We've seen the Silicon Valley Bank closure rock the US financial system, and after that the entire narrative seems to have changed. Earlier, there were indications that the Fed would go for a 50-basis point rate hike. But now, of course, the expectations have been dialled down to either 25 basis points or, in fact, even a pause. But last night, we had the US inflation data come in, and the core Consumer Price Index (CPI) is still elevated. It would seem like the Fed will be in a quandary when it comes to raising rates, what are your own thoughts?

You're right about the core CPI being a touch above consensus expectations, but only a touch above. And if you look beneath the hood, the sticky side is mostly in shelter where we know because of the lag effect of the way it's measured, that it will be coming down in the months ahead. And we know that commodities have been trading very reasonably, they are not, you know, rocketing higher. So I think that we're going to get a March reading of about 5.3-5.2 percent.

The reason I say that, by the way, is because the Cleveland Federal Reserve runs an inflation now cost of 10 high-frequency data series that they aggregate to try to judge what inflation will be, and it's telling them 5.3 percent In March, and I think that would be something that everybody would take comfort from. So to answer your question, and sorry, I've been long-winded, we see 25 basis points next week. And then we think they go on pause, and then we think they cut in the second half of this year.

So you’re saying a pivot is very much in play at this juncture… But talking about the Silicon Valley Bank collapse, do you think regulators have managed to avert a contagion effect? Or do you think this could be another Bear Stearns moment for the US?

I think it's probably more of an IL&FS moment than a Bear Stearns moment, because implicitly, all deposits, even those above $250,000, have been guaranteed. Whereas you didn't have anything like that with Bear Stearns, back in 2008. And this is a small bank. I mean, I was vaguely aware of it, but I can't say I knew anything about it before the incident happened. So you know, more skeletons can and probably will pop out of closets. But overall, I don't think we need to panic. And in fact, the big banks will be net beneficiaries of this, because deposits will go from small banks to big banks.

Also Read:  SVB says Goldman Sachs was the buyer of portfolio it booked losses on

We saw a relief rally on Wall Street last night. But do you think the sentiment is turning increasingly risk-off now, given the fact that gold is above $1,900 per ounce? In fact, Bitcoin has once again reclaimed that $26,000 mark. What’s your take on equities at this juncture? Do you think this relief rally that we saw overnight has more legs to it?

Yes, I do. I mean, you know, obviously, it's extremely choppy right now. And I can't say where the bottom is. But I do think that—well, I don't think that, I know—that if you look back in history, when 90 percent or more of stocks in the S&P are in short-term downward trends, the market has always been higher three, six and 12 months later, and they are in that situation today. So if you put a gun to my head—please don't—but if you did, I would say yes, the market is going to bounce.

Lastly, what's your view on India? We did see a knee-jerk reaction to the SVB collapse as well. But aside from that, foreign money has been consistently flowing out of India. So how does it stack up versus other emerging markets in terms of valuations? Would you still call it a preferred investment destination?

Well, it's always been expensive, more expensive than its peers with one brief exception, which was the bottom of the global financial crisis in 2009. And it's expensive because the return on equity is roughly twice what it is for the emerging market universe. I like it. I was in India last week, I was in Bangalore and Kolkata, giving speeches, and I was followed by a local fund manager and in the Q&A session that followed our events.

Also Read: Fed bets pared as Goldman scraps March hike call on flaring risk

Initially, I was kind of perturbed nobody was asking me any questions, but then I realised it's a good thing because people were more interested in their own market. And to me, that's the most important thing. I'll just say I don't think it's important what foreigners think, it's much more important what the Indians think about their own market and there's an equity culture that's developing there. That's extremely positive for stocks because it'll enforce greater transparency and corporate governance quality, much like is the case in the United States where households in the middle class are invested in the stock market and demand that accountability and the same thing is happening in India. And you can't say that about many other emerging markets in the world.

Nandita Khemka
first published: Mar 15, 2023 01:54 pm