Banking, Energy Selloffs Opportunities for Investors with the Courage to be Contrarians

Over the past two weeks, investors in the financial markets have been living through a wild ride. The collapse of Silicon Valley Bank and Signature Bank in the United States, euro-bank liquidity concerns spreading out from Credit Suisse Group AG, and rumors of margin calls have caused worry and concern. However, for those worried about this being another financial crisis, today’s environment is much different than in 2008. While parts of the market are starting to exhibit similar worries, we think there are attractive opportunities for those brave enough to be contrarian.

Flight to Safety to U.S. Dollars and Treasuries

One of the worrying signs in the market is the flight to safety to U.S. dollars and Treasuries. While this may seem counterintuitive, it does create some excellent opportunities for investors. However, investors need to be careful as there are still some potential risks. For example, it is strange that highly speculative areas such as emerging tech have suddenly become a defensive position holding their own during the recent selloff. Perhaps this is because certain market participants use them to punt on a U.S. Federal Reserve pivot towards lower interest rates.

The Global Economy is Still on Reasonable Footing

Overall, the good news is that the global economy is still on a good footing, especially in the U.S. Low levels of unemployment and improving producer price index and consumer price index data indicate that the latest market correction may be just what is needed to slow what has been a rather persistent services inflation by consumers. Fear can have a large influence on behavior. However, the tough part remains: how central banks will continue to manage inflationary pressures against what appears to be parts of the banking sector buckling under last year’s large upward move in rates.

Central Banks are Swiftly Responding to Stresses

Fortunately, central banks such as the Fed are acting swiftly to stresses, which includes backstopping depositors. We also are starting to agree with the futures markets about the direction of interest rates. They are now factoring in a 100-basis-point rate cut by the Fed within the next 12 months. It wouldn’t surprise us to see the Fed pause, putting itself in a similar position as the Bank of Canada.

Canadian Banks are Attractive Opportunities

From a strategic standpoint, we are closely watching the ongoing correction in the banking and energy sectors. We have deployed excess cash on this selloff to maintain our positioning in these market segments. Specifically, Canadian banks have been caught in the crossfire. They look even more attractive, especially considering how strong they are financially and from a regulatory standpoint compared to others, such as regional U.S. banks and certain parts of the…

Related Facts

• Futures markets are now factoring in a 100-basis-point rate cut by the Fed within the next 12 months.
• Highly speculative areas like emerging tech have suddenly become a defensive position in the recent selloff.
• Central banks like the Fed are responding swiftly to stresses, such as backstopping depositors.

Key Takeaway

The current selloff in the banking and energy sectors offers investors excellent opportunities if they dare to be contrarians. Although the flight to safety to U.S. dollars and Treasuries may appear counterintuitive, it creates a great opportunity for investors to get in at an attractive price. One should watch out for potential risks and backstop depositors. Canadian banks look attractive compared to their U.S. counterparts due to their financial strength and regulatory standard.

Conclusion

The current selloff in the banking and energy sectors is not another financial crisis, but today’s environment is much different than in 2008. It is difficult to manage inflationary pressure against parts of the banking sector buckling under the large upward move in rates from last year. However, central banks like the Fed act swiftly to these stresses, and Canadian banks are attractive to investors compared to their U.S. counterparts. By investing in this market selloff, investors could have potentially lucrative opportunities.