During afternoon trading in the US yesterday, equity markets came under pressure as Silicon Valley Bank (SVB) announced that additional financing is required due to issues they are having with capital within their businesses. SVB is a small bank that provides specialist lending to start ups in Silicon Valley and so is a very niche financial institution.

The sell-off that was driven by investments in the US financial sector yesterday spread to Asia overnight and Europe this morning. Even though the underlying cause of this sell-off is from one small US financial, it seems that short-term investors have sold down all financials across the board.

As investors will be aware, our portfolios continue to have a value tilt and therefore have exposure to financials. Within two of our active holdings in the UK (JO Hambro UK Equity Income) and Europe (Lightman European), financials are an overweight allocation.

We have been in contact with both teams this morning to gauge their views on whether the sell-off is just a knee jerk reaction to the news out of the US or whether there are systemic risks to the banking sector, especially if more institutions come under pressure.

Below are two extracts taken from the calls with the fund managers this morning which we think help to show that the current volatility should be short term in nature and the volatility is providing opportunities for both managers to top up their positions in names which they are positive on for the future.

Even though U.K. and European banks have opened down this morning, there is little direct read across from SVB. The U.K. banks have excess deposits relative to loans as well as very strong capital ratios too which provide additional layers of comfort. The unravelling of crypto and early stage/loss making tech is causing much of the pain here in the US as interest rates move back to a normalised level. We will be adding to our names on the weakness. Clive Beagles – JO Hambro.

The problems in the US banking sector do not apply to Europe today, but sentiment may be impacted. The reason why Europe is less impacted is because the interest rate cycle is less mature in Europe and the competition for deposits is lower. There is still further net interest margin expansion to come. European banks are also helped by a system wide loan-to-deposit ratio that is below 100%. Our own bank holdings have retail-based deposits, often associated with checking accounts, which are sticky. European banks are valued 30% cheaper than US banks, and they also have higher dividends and buybacks. Many banks are set to return 20-30% of their market cap back to shareholders over the coming few years. We anticipate credit quality staying strong, provided unemployment stays low. The sector trades on a PE of 7x with a dividend yield of 6%. Rob Burnett – Lightman.

The sell off in financials has led to losses in global equity markets across all sectors and geographies over the past 24 hours. This type of reaction is not surprising with markets on tenterhooks from upcoming central bank decisions, inflation data releases and other upcoming economic data releases. Many investors are becoming extremely short term in their thinking and reacting to every piece of data.

Two areas where the increase in volatility today has helped are in short term debt and alternative assets. Within fixed income, short term yields have decreased with prices rising as investors have flooded to safe haven assets. This has benefited our shorter duration credit holdings which is another area to which we are overweight. We also have a weighting to gold within our alternative allocation. As gold provides a degree of protection in volatile markets, this has provided some stabilisation over the past couple of days.