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Stock market correction: a once-in-a-year opportunity to buy cheap stocks!

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Stock market corrections happen from time to time. And what we saw last week was something of a shock. Financial stocks slumped after Silicon Valley Bank, a key lender to technology start-ups, offloaded a portfolio of assets, mainly US government bonds, in an attempt to steady its finances.

Shares in the institution fell 65% as investors feared an old-fashioned run on the bank.

So, let’s take a closer look at what happened, and where there could be an opportunity.

Fear of contagion

Investors wiped $52.4bn off the market value of the four largest (by assets) US banks on Thursday after NASDAQ-listed SVB ran into trouble.

Stocks in the UK financial sector also tanked on Friday. The FTSE 100 closed 1.7% down at the end of the day. But banking stocks saw the majority of the losses — the FTSE 350 banking index was down around 4.1%.

HSBC fell over 5%, Lloyds 4.5%, NatWest 3%, Standard Chartered 3.3% and Barclays 3.6%. But other financials were hit too. Legal & General fell 2.5% and Hargreaves Lansdown 5%.

So, why did this happen?

SVB’s $21bn bond portfolio had a yield of 1.79% and a duration of 3.6 years — currently the 3-Year US Treasury note yields 4.7%. The thing is, bond prices fall as yields rise and banks don’t need to include these unreleased losses on their results.

The fiasco is a reminder that many financial institutions are sitting on large unrealised losses on their fixed-income holdings. These losses have come about as rising interest rates have made these bonds less valuable.

Why I’m buying now

With financial stocks falling on Friday, I’m now looking at buying stocks — like Standard Chartered — or topping up my holdings — including HSBC and Lloyds — while they’re cheap. The thing is, I think the risks are very much overdone here.

And news that HSBC has bought SVB for £1 in the UK and a backstop in the US — to protect the entire nation’s deposits — will encourage markets in the near and medium term.

SVB is something of a one-off. The bank tripled its deposits in one year, and was almost entirely focused on the tech sector. Instead, I see the event as a reminder that deposits should be kept in well-regulated and safe institutions. As Davide Serra at Algebris Investments said, larger, safer institutions may well benefit.

The deposit base from the major banks is much more diversified than SVB and the big banks are in good financial health.

My top pick is Lloyds. The UK-focused bank is heavily weighted towards the mortgage market. So there’s minimal connection to the SVB fiasco. But its commercial arm may benefit as businesses seek the relative safety of larger institutions.

Some analysts are also suggesting that central banks, predominantly in the US, will increase increase rates more slowly as a result of the SVB fallout. Higher rates could exacerbate concerns about unrealised bond losses.

Higher interest rates are good for banks until they’re not. Today, interest rates are providing a huge tailwind for banks, as net interest income soars.

But many people are of the opinion that central bank rates will soon be too high for banks. Demand for loans may fall, debt may turn bad, and bond losses may grow. The sweet spot is somewhere between 2% and 3%.

The post Stock market correction: a once-in-a-year opportunity to buy cheap stocks! appeared first on The Motley Fool UK.

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HSBC Holdings is an advertising partner of The Ascent, a Motley Fool company. James Fox has positions in Barclays Plc, Hargreaves Lansdown Plc, HSBC Holdings, and Legal & General Group, Lloyds Banking Group Plc. The Motley Fool UK has recommended Barclays Plc, HSBC Holdings, Hargreaves Lansdown Plc, Lloyds Banking Group Plc, and Standard Chartered Plc. Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors.

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