Stock Take

Strong earnings from a number of large companies contrasted with a third US bank failing last week to provide mixed results for investors.

The bank in question this time was First Republic Bank. Last week, it followed Silicon Valley Bank (SVB) and Signature Bank to becoming the third bank to collapse since the start of March. On Monday, JPMorgan Chase agreed to acquire First Republic’s assets and deposits, limiting some of the wider damage such a failure might have caused.

First Republic mainly catered to wealthy clients and is now the second largest bank failure in US history.

With so many failures in a relatively concentrated period of time, pressures are beginning to mount on local US banks. The increasing interest rates of the past year may have tempered inflation but will have also increased pressures on borrowers. And the recent failures will have also caused investors and savers nerves around smaller US banks. Part of the issue for First Republic was caused by a dramatic fall in deposits after the decline of SVB.

Mark Dowding of BlueBay suggested a mismatch between the maturity of assets and liabilities was at the heart of First Republic’s issues, where it overestimated the average life of deposits, causing it to invest in long-dated bonds. When deposits started to be withdrawn in large scale, this left the bank vulnerable.

However, he says: “We would note that, generally speaking, banks are in a healthy position and are supported by solid interest margins and a relatively benign backdrop for credit quality.

“From that standpoint, it may be that issues pertaining to a small number of institutions need to be resolved, but we would disagree with any notion that we are witnessing developments which are more broadly systemic, in the way we observed with the Great Financial Crisis in 2008.”

Given these issues, a number of commentators suggest they expect to see tighter regulations brought in to help.

These failures and pressures notwithstanding, other large banks and financial institutions posted strong results last week, including Deutsche Bank, Barclays and Santander.

Eoin Walsh, Partner at TwentyFour Asset Management, noted: “One of the more pleasing aspects of the earnings is that many of the banks did well because of increasing net interest margins, driven by higher rates; taking deposits and lending being the bread-and-butter business for most banks. Net interest income is stable and repeatable, which is why it is so important.”

Given the recent failure of Credit Suisse, strong results from its European peers will have pleased investors.

The positive results weren’t limited to just banks and financial markets. A number of large US technology companies reported strong earnings which helped lift the tech-heavy NASDAQ up 1.28%. The S&P 500 also managed to post positive numbers for the week despite the ongoing troubles First Republic was facing. As the banks failure and subsequent buyout from JP Morgan only occurred at the end of the week and the start of this week, the effects may be felt over the coming days.

Recent events will have given the Federal Reserve much to ponder ahead of this week’s Federal Reserve monetary policy meeting. A 0.25% increase in rates has long been expected, but markets will be keen to gain any insight or hints on where the Fed will go from here.

Turning to the UK, the FTSE 100 slipped slightly on concerns around the economy. Local elections are due to take place later this week, with political leaders currently releasing soundbites to try and improve their positions going.

While this might make for nice headlines, Martin Walker, Invesco Head of UK Equities, suggests these elections may not have a huge impact on investments. He notes: “The outcome of the May election in Barnsley will have no discernible effect on the prospects for AstraZeneca’s world leading immuno-oncology pipeline; the size of the swing in North Tyneside will not affect sales of Unilever in Indonesia. Yet together, these two companies alone comprise almost 12% of the FTSE All-share index.”

Wealth Check

They say you can’t put a price on family, but just how much does it cost to raise a child? In the UK, raising a child from birth to 18 in 2022, including household and childcare costs, stood at £157,562 for a couple and £208,735 for a lone parent1.

With the general costs a child brings, as well as the increased cost of living, many parents feel squeezed to make ends meet, let alone think about funding future costs like a car, university, or a deposit for a house. But building a nest egg for your kids doesn’t need to break the bank and could make a huge difference to their future.

Parents, grandparents, and other family members are often keen to give children a head start in life for when they reach a certain age. Buying a first home or helping them to start their own business can be made far more affordable by starting to save early. Introducing the concept of saving and the benefit of investing for the long term to your child at an early age is also a great way to encourage smart money habits long before they become adults.

Technically, children are liable to pay tax on savings, as they have the same income tax allowance as adults. It’s uncommon, though, as children generally don’t earn money, and their savings don’t tend to earn enough interest to exceed any tax thresholds.

Like adults, in the UK children are entitled to a tax-free personal allowance of £12,570 in the 2023/24 tax year. If this income is from savings interest, there are extra tax-free allowances in addition to the personal allowance, allowing a child to potentially earn up to £18,570 tax-free in the 2023/24 tax year. This could be increased if you include the dividend allowance of £1,000.

Discover the smartest ways to save for your children by talking to a financial adviser. They can support you in planning for your children’s financial future. Get in touch with your SJP Partner today.

The value of an investment with St. James’s Place will be directly linked to the performance of the funds you select and the value can therefore go down as well as up. You may get back less than you invested

The levels and bases of taxation, and reliefs from taxation, can change at any time and are generally dependent on individual circumstances.

SourceChild Poverty Action Group, 2022

In The Picture

Over the long term, different funds can offer notably different performance. However, it is also important to remember that they may have different objectives and goals.

Source: Financial Express. Bid to bid basis. Data as at 28 March 2023.

Please be aware past performance is not indicative of future performance. The value of an investment may fall as well as rise. You may get back less than the amount invested.

The Last Word

“Cloud gaming needs a free, competitive market to drive innovation and choice. That is best achieved by allowing the current competitive dynamics in cloud gaming to continue to do their job.”

Martin Coleman from the Competition and Markets Authority explains why the CMA blocked Microsoft’s $68.7 billion acquisition of games publisher Activision.

BlueBay, TwentyFour Asset Management and Invesco are fund managers for SJP.

The information contained is correct as at the date of the article. The information contained does not constitute investment advice and is not intended to state, indicate or imply that current or past results are indicative of future results or expectations. Where the opinions of third parties are offered, these may not necessarily reflect those of St. James’s Place.

Source: London Stock Exchange Group plc and its group undertakings (collectively, the “LSE Group”). ©LSE Group 2023. FTSE Russell is a trading name of certain of the LSE Group companies.

“FTSE Russell®” is a trade mark of the relevant LSE Group companies and is used by any other LSE Group company under license. All rights in the FTSE Russell indexes or data vest in the relevant LSE Group company which owns the index or the data. Neither LSE Group nor its licensors accept any liability for any errors or omissions in the indexes or data and no party may rely on any indexes or data contained in this communication. No further distribution of data from the LSE Group is permitted without the relevant LSE Group company’s express written consent. The LSE Group does not promote, sponsor or endorse the content of this communication.

© S&P Dow Jones LLC 2023; all rights reserved

Source: MSCI. MSCI makes no express or implied warranties or representations and shall have no liability whatsoever with respect to any MSCI data contained herein. The MSCI data may not be further redistributed or used as a basis for other indices or any securities or financial products. This report is not approved, endorsed, reviewed or produced by MSCI. None of the MSCI data is intended to constitute investment advice or a recommendation to make (or refrain from making) any kind of investment decision and may not be relied on as such.

SJP Approved 02/05/2023

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