Synopsis
Major banks like Credit Suisse, Swiss Bank and Deutsche Bank shares fell drastically amid rumors that European banks are under critical stress. Credit Suisse’s share price fell by 10% in a single day, Deutsche Bank shares fell by 5%.
Key stock market indices like Sensex or Nifty losing or gaining over 1,000 points still make a strong impression on most mutual fund investors. It is another matter that wild swings have been the norm in the stock market lately. May be the global factors like runaway inflation, steeper rate hikes, higher oil prices, looming recession, among others adding to the anxiety of ordinary mutual fund investors, especially new investors. The new worry for such investors is ‘another likely crisis’ due to trouble in the European banking system. Major banks like Credit Suisse, Swiss Bank and Deutsche Bank shares fell drastically amid rumors that European banks are under critical stress. Credit Suisse’s share price fell by 10% in a single day, Deutsche Bank shares fell by 5%. Credit Suisse shares have fallen 60% year-to-date.
According to some pundits, the scenario could snowball into a repeat of the 2008 Lehman crisis, which triggered a global recession. Market analysts say that even though India is in a better position, the impact will be felt even here. Market analysts believe that even though no one can predict what might happen with the bank crisis going on in Europe, markets will continue to be under stress for some time. Credit Suisse CEO is expected to present a strategic plan on October 27 to avoid filing for bankruptcy.
Fund managers in India believe the situation is unpredictable and equity mutual fund investors should be prepared for volatility.
“We do see some European banks under pressure due to their widening CDS (Credit default swaps) levels and nose dive in share prices. We have to note that this is not like 2008. Back then, the crisis started with a credit problem. There was too much credit in one segment which was not doing well and became stressed. That became a solvency and liquidity issue,” says Arvind Chari, CIO, Quantum India, UK.
“Today, we don’t see a global banking credit issue. What we are seeing is that there could be a lot of trading issues. The way currencies have moved, there are trading positions and mark to market losses which are fairly high. That is one reason for the banks. In terms of India, we will see an impact on flows and sentiment and that can bring volatility in the market. But if you look at the Indian banking sector, it is much better placed,” says Arvind Chari.
Market analysts say that the rapidly increasing interest rates globally has impacted the banks and made the issues much bigger. They also say that the stress in the banking sector might further trigger the interest rates and impact the currencies across the globe. This will result in a lot of indirect impact on Indian equity markets and hence the returns from equity mutual funds as well.
“The interest rate cycle is going up very fast globally. It obviously has created a ripple effect in the global economy that we are seeing unfold in the European banks. No one knows whether it will be like 2008. It definitely is not like that yet, but it can become bigger. Central banks globally want inflation to come down at any cost,” says Sonam Udasi, Senior Fund Manager, Tata Mutual Fund. “Usually, after 2008 we have seen central banks stepping in to help. We will have to see how that happens in this scenario. If many such banks were to come out with issues, then the pressure will build. Even though things look far better in India, we are a globalised economy and the impact is going to be there. Hence, we expect the market to remain volatile in the short term,” says Sonam Udasi, Senior Fund Manager, Tata Mutual Fund.
Both the fund managers suggest that investors should be prepared for bouts of volatility in the equity markets for another two months. They believe that investors will see the impact on their portfolios. “If you are an investor with a five-year plus horizon, try to ignore the volatility in this phase. Many investors find it difficult to re-enter the market after the crisis is over. So stay invested,” says Sonam Udasi.
To sum it up, the scenario is troubling and it could become a major crisis. However, history teaches us that it is difficult to predict the market. The recent covid-fuelled crisis was supposed to result in a bear phase in the stock market. However, the market defied doomsday predictions. In fact, the market always bounces back in the aftermath of a crisis. It is never easy to predict when the market will take off and enter the market at the right time. That is why most investment experts ask investors to stick to their investment plans during crisis situations.
( Originally published on Oct 04, 2022 )
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