“Not a repeat of 2008”: MFS

Yasmine Raso

Senior Journalist, Financial Newswire

11 April 2023

As some market commentary continues to draw comparisons between the current banking crisis and that of 2008’s Global Financial Crisis (GFC), MFS Investments has taken a different approach.

Robert M. Almeida, Jr., Portfolio Manager and Global Investment Strategist at the firm, said while the two are “dissimilar” it could still accelerate the path taken towards a recession.

“Today’s crisis is a result of artificially suppressed interest rates, another of those unintended and unwelcome consequence for policymakers. Years of subdued savings rates and anaemic demand for consumer loans pushed banks into investing deposits into bonds, allowing them to earn a hefty spread,” he said.

“But as savers shifted out of deposits into materially higher yielding money market funds, T-bills and the like, asset liability mismatches occurred, resulting in the stresses seen in recent weeks.

“In speaking with clients, I’m repeatedly asked ‘Is the crisis over, and which bank is next?’ But what may matter more than if another regional bank will fail — as there is likely to be more given how portable deposits are due to digital banking — is the feedback loop to the economy.

“Small banks are significant providers of capital to individuals, small businesses and other borrowers that drive the bulk of economic activity. While some of that lending slack will be absorbed by larger banks (which don’t face the same risks to deposits), the current climate makes deposit-funded banks less willing to lend.

“This is a disinflationary force that accelerates the pathway to a recession. Recent and not-so-recent moves in the bond market point in that direction as well.”

Almeida, Jr. also said amid the “great unwind” of central banks, there lies opportunities for investors.

“The surge in inflation over the last 18 months has forced global central banks to unwind many years of policies that suppressed interest rates,” he said.

“While the normalisation of interest rates has exposed small pockets of stress, in our view there are more unintended and unwelcome consequences to come.

“We think this new environment should set the stage for a multi-year transition in leadership from non-discretionary portfolios to fundamentally oriented active strategies and create significant opportunities for alpha generation.”