A fretful time for investors

George Gatch, chief executive of JPMorgan Asset Management, offered a bracing assessment last Tuesday of his approach to global markets.

Investors were reeling from the previous weekend’s emergency rescue of Credit Suisse. The bank’s shotgun wedding with historic arch rival UBS had been announced on Swiss television on Sunday evening with all the joy and fanfare of a wake.

Only around a week beforehand, markets had been thrown into a spin by a series of failures in the US regional banking sector — a shock that had sparked an explosive rush to the safety of government bonds.

Gatch was not saying now is the time to panic. But by the same token, he was not taking any chances, telling a gathering of journalists that the asset manager had activated the “market stress protocol”. This is not something the investment house undertakes lightly. Previous activations have included in March 2020, when the global acceleration of the Covid pandemic hit stocks first and later, more alarmingly, bonds too. It also took this step when Russia launched its invasion of Ukraine last year.

Now Gatch is seeing enough signs of fragility emerging after the aggressive monetary tightening that started in 2022 to go through the same process again. This involves putting around 22mn positions through what Gatch called a stress analyser. Portfolio managers, traders and others in the firm meet daily, rather than the usual weekly get-togethers, looking at flows and at so-called liquidity conditions — the ease with which trades get done without beating up market prices — to discuss where vulnerabilities may lie. “This allows us to identify where we need to pull back,” he said. “It’s as much about avoiding mistakes as it is about identifying opportunities.”

This sums up the mood among fund managers at the moment quite nicely. Investors are not panicking. But it is once again acceptable to ask in polite circles whether we are seeing 2008 all over again. Every single professional investor I’ve spoken to over the past two weeks has said “no”, and for what it’s worth, I agree with them. Still, many acknowledge that the echoes are strong.

Anyone who has been in the markets for more than 15 years can remember that period when one after the other, small and seemingly insignificant subprime lenders that they had never previously heard of started to die off. Investors grew nervous but most failed to connect the dots. US regional banks now do not feel so different.

Similarly, cast your mind back to March 2008, when the swelling credit crunch reached the point where JPMorgan bought Bear Stearns in a speedy arranged marriage with passing similarities to the latest Swiss union. As the Financial Times reported at the time, authorities had pushed for the Bear Stearns deal to be wrapped up before markets opened on the Monday morning “to stave off a run on other US and European banks”. It worked. The S&P 500 index was nearly 4 per cent higher by the end of that month, and 12 per cent higher by mid-May. We all know what happened next.

This time does genuinely appear to be different. Banks as a whole are better regulated, safer beasts than they were 15 years ago, especially in Europe. And yet here we are, with the continent’s bank stocks taking a seemingly unprovoked dive on Friday, pulling Deutsche Bank down as much as 14 per cent at one point in the day and pushing up the cost of insuring its debt against default.

One really important thing to bear in mind here is that European bank stocks have just carved out a massive rally — around 50 per cent from October last year to the start of March. That’s enough to lure in what many fund managers somewhat disparagingly refer to as “tourists” — short-term non-specialist investors who are as quick to get out as they were to get in.

“Investors that had not been involved in a while” entered this space, said Dublin-based Kasper Elmgreen, head of equities at Amundi. The rally got “a little bit ahead of itself”, he said. That means it does not take very much to push stocks the other way. Still, the mood has clearly darkened and confidence in the banking sector as a whole is wobbling.

“Everyone is a little bit on edge and there’s a bit of muscle memory,” says Elmgreen. “If you look at SVB, that was idiosyncratic. Signature Bank and Credit Suisse were idiosyncratic. But the market is trying to understand whether there’s a systemic issue here.” Elmgreen doesn’t think there is one. He says Amundi remains “positive” on core European retail banks, and does not see any fundamental shift at play.

It will be very hard for policymakers to hose this down. If they leap behind lecterns in an effort to reassure investors and depositors that everything is fine, they risk making everyone think the situation is graver than they previously thought. If they say nothing, they risk a snowball effect with self-reinforcing bursts of nerves. These are halcyon days for online warriors trying to stir up a global banking crisis, and wise readers would do well to ignore them. Nonetheless, this does seem a good time for “market stress protocols” and tin hats.

[email protected]