We reduced the risk level of the portfolio last week because the regional banking crisis in the US seemed to be spreading to new companies – PacWest Bancorp and Western Alliance Bancorp. The portfolio is temporarily 50% in cash while we assess the situation.
The most likely scenario is that the crisis will subside and banks will rebound. Bank earnings have been OK, and it appears that speculative short-selling activity has put fundamentally unjustified pressure on bank shares. Any news about wider deposit guarantees or a short-selling ban could provide fuel for a bank rally.
However, while the idea of our strategy is to take on plenty of risk in the portfolio in general, it is important to manage risk as well. If the crisis were to spread, bank shares could easily drop 20%+ in a few days. This is not a risk we want to take at the moment.
Influencing this decision is that seasonality has become weaker, liquidity is dropping, and the US Congress is yet to reach an agreement on increasing the US debt ceiling.
We expect to run a balanced portfolio until the US debt ceiling situation is resolved.
A majority of the Financials positions in the portfolio were sold. Positions were opened in Pan American Silver, a gold and silver miner, and Pfizer, a pharmaceutical company.