Overview
In just 3 weeks, the mood in financial markets shifted from inflation concerns to fear of a global banking crisis.
In this context, the Financial Sector Equity funds category lost nearly -15% since the beginning of March 2023, while the Mining & Precious Metals Equity funds category gained nearly +6%.
Indeed, these two categories have always been diversifying relative to each other. Financial Sector Equity funds outperform during periods of growth and inflation, while Mining & Precious Metals Equity funds are more resilient during periods of low growth or recession.
The reasoning is straightforward. Banks thrive when both the volume and rate of loans increase. The higher the rate, the more profitable banks become. Meanwhile, precious metals become universal safe-haven assets during periods of fragile growth.
The rotation from financial sectors to the Mining & Precious Metals sector is therefore a sound natural diversification within the equities asset class.
Current Situation
Indeed, the collapse of Silicon Valley Bank (SVB), the emergency discounted acquisition of Credit Suisse by UBS, the risk of Deutsche Bank failure, and the US government’s refusal to guarantee its regional banks all brought back painful memories of 2008.
Scenarios
2008-Type Banking Crisis
A banking crisis materializes. Initially, systemic risk would drag all equity categories down in its wake. However, once a crisis consensus forms, sector rotation would strongly favor the Mining & Precious Metals category over financials. The extreme example would be the 2008 situation. From a charting perspective, the behavior of the spread between the two sectors since March 2023 is very similar to that of the great subprime crisis.
2022-Type Return of Inflation
The recent banking risk proves to be merely anecdotal. The theme of high but stabilized inflation returns to center stage. The recent discount on financials could then favor the sector, as it did during the 9 months preceding the SVB black swan event.
Past performance is not indicative of future results. The content above does not constitute investment advice. It is an objective analysis of financial information.