Dear Investor
The last weeks of the first quarter of the year have been marked by the banking crisis originating in the US after the fall and subsequent rescue of the regional bank Silicon Valley Bank, followed a few days later in Europe by the collapse of the Swiss bank Credit Suisse, subsequently absorbed by its rival UBS AG, with the support of the Swiss authorities.
In this environment, volatility in the markets has been the general trend, although the stock markets managed to close the quarter in positive territory, specifically +7.8% in the case of European shares, measured by the STOXX Europe 600 index and + 5.1% for the American S&P 500 measured in euros. Ten-year bonds, both German and Spanish, ended the quarter without much variation compared to the end of the year, 2.3% and 3.4% respectively. For its part, the one-year Euribor in Europe rose to 3.6% from 3.3% at the end of the year, although below the almost 4% it reached in mid-March.
Summary of the recent banking crisis
In their race to try to tame inflation through tighter monetary policy, the major central banks now face a major dilemma: whether or not to continue raising interest rates, as the rapid rise in recent months is behind the recent crisis that has affected the most vulnerable banks, specifically American regional banks. In essence, the combination in the US of lax regulatory supervision and improvable risk management explains the vulnerability of these banks to the new scenario of higher interest rates.
Although the standard international regulation of banking is governed by the regulation known as Basel III whose objective is to strengthen the regulation, supervision and risk management of the banking sector, the key difference lies in the way in which said regulation is transposed to different geographic jurisdictions. Specifically, the European Union legally transposed this regulatory framework through directives and regulations focused on further strengthening the supervision and capital requirements of banks and, therefore, making them better prepared for events such as those experienced now. Hence, in the face of the recent crisis, the EU's economy commissioner, Paolo Gentiloni, ruled out the possibility of real contagion in European banks.
The banking reality on both sides of the Atlantic is, indeed, very different.
Even within Europe, the regulation of countries like Switzerland is very different from that of its neighboring countries in the European Union, see the example of Credit Suisse.
With cases like this, one can better understand the reason for greater supervision and demands by the European authorities, nothing like being in the ICU to assess life and prevent future risk behaviors. This is precisely what makes the difference with the US, Switzerland and other geographies, and what makes it difficult for the American or Swiss crisis to spread to other European banks.
Real estate investment
Until now, in a falling interest rate environment, even non-competitive asset values rose because lower interest rates pushed up their market value. However, interest rates have stopped falling. “The classic buy and hold strategy has lost its competitive position to buy and manage.
We are in a scenario of rising interest rates and risk of recession that is affecting the confidence of real estate investors around the world. However, while there is pressure on the prices of assets, such as equities, bonds or real estate, when inflation and interest rates increase, the real estate sector can see its income grow. For this reason, he considers that "the real estate sector continues to be relatively attractive as an asset class, especially in an inflationary environment."
“We believe that the real estate sector can continue to provide attractive long-term risk-adjusted (inflation-adjusted) results. In the future, however, the type and location of a property will play an even bigger role than in the past: uncompetitive buildings with lower tenant demand will see their returns and value decline. Knowing which assets to invest in will be crucial to avoid downside risks”, he explains.
As he details, since real estate rentals in Europe are often linked to the local consumer price index, "inflation can also lead to higher incomes for real estate owners, which bolsters property values." Furthermore, it notes that leasing activity and rental demand are relatively strong, contrary to what happened, for example, during the recession of the early 2000s and the global financial crisis.
However, it warns that real estate investments run the risk of being affected by rapid macroeconomic developments in the short term. “At the same time, real estate investors often have long-term investment horizons, making it even more important to watch for long-term megatrends that create supply-demand imbalances in certain locations and sectors,” he says.
In fact, it refers to the imbalances between supply and demand, which occur by cities and by sectors. And this has resulted in a differentiated market outlook for both rental growth and total returns. "In this environment, a thorough analysis is important: only some markets will be able to offer total returns that compensate investors' risk,"
Thank you very much for continuing to entrust the management of your heritage together with ours.
Sincerely,
Sincerely,
EQUATH Investments
David Duran
Founding Partner
Barcelona, April 22, 2023
