Spooked investors should hold the right amount of cash and seek stocks able to ride that economic rollercoaster.
Irish Independent
Gabrielle Monaghan
2nd April 2023
Irish investors old enough to remember the so-called St Patrick’s Day Massacre of 2008 – when the now-notorious Anglo Irish Bank took the biggest hit of an Irish stocks slump that wiped €3.5bn off the market – could be forgiven for shuddering last month when there was a run on Silicon Valley Bank (SVB) and it became the largest US lender to fail since the financial crisis.
Investor nerves were further rattled by the collapse of another US regional bank just two days later, the shotgun takeover of Credit Suisse by UBS, and concern about the health of Deutsche Bank. The collapse of SVB and the rescue of Credit Suisse sparked fears contagion would spread from the banking and tech sectors and tip the global economy into a recession.
“There’s a lot of nervousness in the market right now,” says Kasper Elmgreen, global head of equities at Amundi, Europe’s largest asset manager. “Part of it is natural profit-taking after a very strong cyclical rally, but part of it is nervousness around the banking sector, fear is there is a level of contagion here, and a degree of muscle memory about the great financial crisis.”
So how do you manage your money when markets are so turbulent? Consider the following tips and factors from financial experts and investors.
Are my savings safe?
Any savings you have at a bank or credit union authorised by the Central Bank are protected by the State’s deposit guarantee scheme, to the tune of €100,000 for each institution, if a bank or credit union is unable to repay deposits. The threshold was boosted from €20,000 in September 2008 at a time when panicked bank customers were withdrawing their funds amid concerns about a banking collapse.
Deposits held with credit institutions authorised in other European Economic Area countries are also covered by that country’s deposit guarantee scheme. But the protection doesn’t extend to pension funds, Approved Retirement Funds (ARFs), or investment products.
However, if you’re fortunate enough to have a couple of hundred thousand on deposit – say, for saving for a high-end home or because you are exceptionally risk-averse – your option to spread that cash across different institutions and still receive deposit protection is limited by the departure of KBC and Ulster Bank from the Irish market. If you’ve maxed that €100,000 threshold across each institution, you need to invest in other assets, says Kieran McAuliffe, a director of Cork-based financial advisory firm Provest Private Clients.
How much cash should I hold?
The banking turmoil poses risks to global financial stability, the head of the International Monetary Fund warned last weekend. The ECB has also said it will have a real impact on business and growth.
While Ireland’s economic growth is predicted to continue outpacing the rest of the EU this year, you should reduce your debt and have a cash cushion to fall back on in case a worsening global outlook prompts your employer to cut jobs. This is especially the case if you work in the multinational tech sector, where big-name employers are announcing job cuts.
McAuliffe says: “You should have at least three to six months of an emergency fund in place in case you lose your job. If you are in an older stage of life or are working in a specialised role, you may need to have 12 months of cash in place.”
In financial markets, there has been a flight to cash and money market funds in countries such as the US and UK since the latest bout of market volatility began. But the opposite is true in Ireland, where there’s already around €150bn on deposit, because our banks offer such a paltry return on deposits, despite benefiting from six interest rate hikes by the European Central Bank since July.
For instance, Permanent TSB will give you an interest rate of just 1pc for keeping your money on deposit for a year, despite the main ECB rate standing at 3.5pc. And you lose a third of any return on your deposit to Dirt tax. In addition, the meagre returns offered by Irish banks are dwarfed by the annual inflation rate of 8.5pc, meaning the purchasing power of your cash on deposit is being eroded.
If you are adamant you want to keep your cash at a bank for longer than a year and avail of a deposit guarantee, you can use providers such as Raisin.ie – which has a German licence – to access savings accounts in other euro-zone countries that offer higher interest rates.
Pay down debt
Few investments will give you the kind of guaranteed return that comes with paying off debt. Start with the debt that commands the highest interest, like credit cards and overdrafts, and then move onto personal loans, credit union loans, and car finance.
Assess your appetite for risk
While many occupational pension schemes do have a default de-risking for people approaching retirement, it would be wise to ensure your risk appetite in any of your own investments still matches your long-term financial goals in this market environment.
What should I do with my banking shares?
In the aftermath of SVB’s collapse and the crisis at Credit Suisse, investors responded by selling bank shares indiscriminately amid concerns about the overall stability of Europe’s banks. However, Elmgreen says Amundi strongly believes the crisis is very different to the 2008 crash.
“The banks are in a much better place today than they were back then,” he says. “The banks in Europe have much healthier capital levels and are much more conservative in the way they are run. The regulation they operate under is much tighter.
“The banks in Europe were burdened by negative interest rates for almost 10 years. What we have seen now is that they are benefitting quite a lot from the rise in interest rates. Central banks pulling the handbrake is damaging for companies with high levels of debt and negative growth, but positive for the banks. But banking is all about confidence and trust, which we have seen eroded in the last few weeks.”
McAuliffe recommends emulating some of Provest’s clients, who have been requesting the breakdown of the sectors in which they are invested.
Diversify
If you’re still concerned, you might want to divest some of the more volatile elements in your portfolio. Instead, look for investment grade bonds and equities in sectors that may be better able to weather the storm, including “high-quality pharmaceutical companies and consumer staples with strong balance sheets”, Elmgreen says.
“The cycle we are entering into is going to be very volatile in the early stages,” he says. “It favours some of the more traditional companies, more value companies, in sectors such as industrials, materials, and energy.”