Update on financial markets

Main takeaways

• A US bank for start-up companies went bankrupt on Friday, causing financial markets to worry about wider consequences.
• The direct impact on Selma investments in the US market ETF is negligible. The indirect impact through market uncertainty is dampened thanks to Selma’s investment approach.

What happened – Silicon Valley Bank bankruptcy

On Friday, March 10th, the Silicon Valley Bank (SVB) from San Francisco, USA, went bankrupt. The 39-year-old bank was mainly active in financing start-up companies in the US and was the 16th largest US bank before the collapse. In response, the S&P500 index for US company shares declined 1.5% on Friday. As of writing, the European Eurostoxx 600 market followed with a decline of around 2% on Monday morning.

US authorities reacted quickly and guaranteed the safety of all deposits of SVB’s customers. Nevertheless, markets continue to worry, probably mainly about the potential knock-on effects on other banks. Because actually, SVB’s share price decline started long ago. Between late 2021 and early last week, it lost two-thirds of its peak value, without causing much of a stir.

(How) does it affect investments at Selma?

The direct impact is very, very small: SVB was listed on the S&P 500 index. Thus, by its passive nature to invest in the whole market, Selma’s ETF for the US company share market also included a very small investment in SVB. Just before the collapse of its stock price, SVB accounted for just 0.05% of the S&P 500 index. In other words, the weight of SVB in the US ETF was similar to a single coffee bean in your typical 250g bag of Arabica. ☕ 

Keep in mind that your typical Selma portfolio also contains many other ETFs. This is like your kitchen having also Robusta, Excelsa and Liberica coffee beans, preferably also various sorts of each…

Meanwhile, the index provider Standard & Poors has decided to replace SVB in the 500-company-strong S&P500 index by Wednesday, March 15th, 2023. But in any case, the tiny share of SVB from the whole index means that the direct impact on the ETF performance is negligible.

What is Selma doing about this?

Selma portfolios have various features to minimize the direct and indirect impact (through market uncertainty) from such turbulences:

• Selma portfolios spread the investments very broadly across the world (aka “diversification”). This dramatically minimizes the direct impact that a failure of a single company can have.
• Selma portfolios often contain loans to companies and countries across the globe. These loans have gained significantly in value over the last few days.
• Selma always invests also in precious metals (gold and silver), which add further stability to the portfolios. As of writing, gold and silver prices are up 4.5% and 7.5%, respectively, since Thursday.

Outlook

As we wrote in our quarterly market update last week, major economies are actually doing rather fine so far. There have been no signs of recession so far. Still, markets may continue to worry about the potential consequences for the global banking sector for a while.

As usual, it remains important to invest well diversified and to keep a long-term focus. Ideally, your investment plan aims at least 5 to 10 years ahead. With a plan to invest regularly, e.g. every month, you can benefit from periods of lower prices for company shares.