Cash and defensive sectors may soften blow from bank crisis sell-off

• After SVB’s collapse, fears of a wider financial crisis led to a sell-off in regional bank shares.
• Barclays said defensive sectors helped cushion losses and advised investors to stay with cash.
• “Like many of our customers, we found ourselves sitting on the wrong side of the banking trade this week.”

In little more than a week, three US banks collapsed and a $30 billion bailout was set up to save another lender, but holding onto cash and defensive equity sectors are solid options for investors as the turmoil continues, Barclays said.

Investors, depositors, regulators and corporate executives were shaken by the precipitous failures of Silicon Valley Bank, Signature Bank and Silvergate Bank. And as the resulting selloff engulfed U.S. regional bank stocks, First Republic Bank on Thursday landed a $30 billion lifeline from Wall Street banks.

Fears of a spreading financial crisis briefly erased the S&P 500’s gains for 2023, but what helped soften the blow for Barclays from the sale was “leverage positioning,” it said.

“Our overweight Staples and Tech and underweight industrials helped us cushion losses from our overweight energy and banks this week,” Emmanuel Cau, Barclays’ head of European equity strategy, wrote in a note to clients on Friday.

“Like many of our customers, we found ourselves sitting on the wrong side of the bank trade this week,” Cau said. “The narrative for the sector has arguably changed. Although higher for longer interest rates were expected to help banks’ earnings, it appears they may also bring stress to the banking system.”

The leveraged approach was crafted by adding selective cyclical values ​​in its 2023 outlook while retaining some defensives and quality assurances.

“Similarly, we recommended holding cash given its attractive yield. We believe it remains the right strategy,” Cau said.

Indeed, investors have already rushed to cash and cash equivalents, with $120 billion pouring into money market funds over the past week, the largest amount since the early stages of the 2020 COVID pandemic.

The jump coincided with depositors looking for safe places to put their money at Silicon Valley Bank and Signature Bank, each seized by regulators to head off the risk of further bank runs.

And while yields on short-term government debt have fallen in recent sessions as traders price in potential Fed rate cuts, they remain higher than a year ago. The 2-year Treasury yield on Friday hovered around 3.9%, up from 1.95% a year earlier.

Despite being “wrong-footed” by the collapse in interest rates and bank stocks, many investors had already moved into cash in the past 12 months as they braced for a potential recession, Cau said.

Meanwhile, sector flows have been mostly tilted to defensive areas of the stock market, despite a small pro-cyclical shift in recent weeks, such as a post-SVB rally in tech stocks.

“So while falling markets rarely produce good returns for equity investors, we think their low-risk exposure this week likely reduced the pain,” he said.

Barclays added that fears of another global financial crisis are overblown as the banking system is on firmer footing now.

“Assuming calm returns in the banks, we think stocks could bounce,” Cau said. “However, portfolio allocation in such an uncertain environment is difficult and potentially more suited to active than passive managers.”