CIARAN RYAN: Rising interest rates have exposed various risks in the financial markets, not least the recent banking crisis in the US and Europe. The biggest banking failure since the 2008 global financial crisis hit markets in March 2023, after several bank failures in the US, including Silicon Valley Bank. That crisis jumped the water to Credit Suisse in Europe, which was taken over by UBS.
But I think it’s important to put this in some quantitative measure so that we can see exactly what the impact is. So it’s a drastic change, and I think there are many habits that settle in – in loose economic conditions. And then many of those habits need to be unlearned through a period where there are interest rate hikes. This applies to both consumers and businesses.
In SVB’s case they had an additional problem because ultimately the way that the banks make money is by taking those deposits that come in from people who want to earn interest on [the deposits]. They essentially either lend it out to people who need the money, who can now no longer afford to repay it, or if they don’t extend those loans because of the tougher conditions; they themselves need to reinvest [the money] for some type of an investment income.
ADRIAAN PASK: Well, I think there’s actually a bit of an interesting history there, and it seems like these days we can’t get away from talking markets without also talking politics. That would extend into the US example as well. If we look at our South African banks, they remain exceptionally well capitalised. They’ve been preparing for tough conditions for a very, very long time.
ADRIAAN PASK: Yes, I think it’s very likely that we will see a recession. We’ve also previously spoken about the yield curve – and I think that’s a familiar topic for many by now, and as a leading indicator, it has a very good track record of predicting a recession. Typically, if the yield curve is inverted, in other words, the short rates are higher than the long rates, you can expect a recession.
But I think what we can expect to see in the US economy is obviously, by definition, negative growth. The silver lining, however, is slowing inflation because there’s less demand and there’s less pressure on prices. But that will be in insulated areas. So largely the things that are driven by consumer demand – for example, wages, will take time to filter through the economy as well, and some of the other things that are more commodity driven, for example, might be stickier.
But affordability of debt is going to become a problem and I think many businesses that have adopted that looser spending, freer spending, less disciplined approach, could be caught by the higher interest-rate environment and we could see bankruptcies tick up. CIARAN RYAN: That is my next question. My final question is about where the opportunities are, given the scenario that you’ve just been explaining.