US banks have remained in the firing line after the banking crises back in March. This time Moody’s, one of the big three credit rating agencies in the US, has downgraded the credit ratings of 10 small-to-medium sized banks and placed six larger banks under review.
Credit ratings are used to determine the quality and strength of a company’s financials and risk of them defaulting on their debts.
Moody’s classify their highest rating as Aaa and their lowest rating as C. Anything rated at or below Ba by Moody’s (or BB by other rating agencies) is deemed speculative grade (or high yield) and anything above is deemed to be investment grade.
Moody’s have said the downgrade in small and medium-sized banks reflects issues in the banking sector like funding pressure, capital weakness and exposure to commercial real estate.
Since smaller banks have lower capital requirements than large banks, they’re more exposed to interest rate changes and more vulnerable to a loss of investors’ confidence.
Large banks were also targeted with six large banks placed under review. Again, Moody’s put this down to funding pressure and potential capital weakness. With higher interest rates, the banks' fixed-rate loans become less valuable and can cause profitability concerns and create liquidity risks.
S&P, another one of the big three independent credit rating agencies, also downgraded five regional banks.
Could this be a sign of recession?
With regional banks being downgraded, there are concerns that this could be a signal of a weakening economy and even a recession.
Lower profitability, along with banks requiring a higher amount of capital, could restrict the number of loans being given out to consumers and businesses. Without these loans, they won’t be able to go out and spend that money or invest in their business in order to boost the economy.
Weakness in commercial real estate, and in particular office buildings, also shows the pressure the US economy is coming under.
More people working from home and not in the office has caused commercial property prices to fall. Those workers will also then not be spending money on commuting or other local businesses in that area.
Regional banks are often the lenders for businesses acquiring commercial property and therefore are highly exposed to a downturn.
What happened at the annual Jackson Hole conference?
It was the Federal Reserve’s (Fed) annual Jackson Hole conference in August and was led by Jay Powell the Chair of the Fed. There was a lot on the agenda for the highly anticipated conference, but inflation was the hot topic throughout.
Powell remained hawkish in his views on inflation. He said that although it’s moved down from its peak, it’s still too high and he’s prepared to raise rates further.
August’s headline inflation figure was 3.7%, higher than the 3.2% recorded in July but now well below the peak of 9.1%.
Another closely watched indicator is core inflation, which strips out volatile metrics like food and energy. This continued to fall in August and came in at 4.3%. Despite headline inflation rising, the Fed decided not to increase interest rates and hold them at a range of 5.25%-5.5%.
How have the US Wealth Shortlist funds performed?
Investing in these funds isn’t right for everyone. Investors should only invest if the fund’s objectives are aligned with their own, and there’s a specific need for the type of investment being made. Investors should understand the specific risks of a fund before they invest, and make sure any new investment forms part of a diversified portfolio.
This article isn’t advice. Investments and any income they produce will rise and fall in value, meaning you could get back less than you invest. If you’re not sure if an investment is right for you, ask for financial advice. Remember, past performance is not a guide to the future.
For more details on each fund and its risks, you can use the links to their factsheets and key investor information below.
The strongest performer of our Wealth Shortlist US funds over the last year was the Baillie Gifford American fund.
The fund rose 6.36%* over the past 12 months, outperforming the IA North American sector average. Performance was helped by the fund's ‘growth’ style of investing coming into favour in 2023.
The fund had a difficult 2022 as interest rate rises and spiralling inflation prompted investors to move away from stocks with high growth potential. However, with inflation now falling and the nearing of the top of the interest rate cycle, investor sentiment has improved.
The fund also holds a number of stocks which could benefit from the advancements in artificial intelligence (AI). Investors have taken a view that AI will help businesses become more efficient and offer a better service to customers. And so far this year we’ve seen a number of these company’s share prices skyrocket.
The growth of AI – the dangers of following the crowd
The fund aims to outperform its benchmark over five-year periods, with a concentrated portfolio including some exposure to smaller companies. Both of these factors increase risk. The fund’s growth focus can also lead to periods of volatility.
The weakest performer over the past 12 months was Artemis US Smaller Companies, returning -3.66%.
Although the fund did outperform the Russell 2000 index which returned -3.90%, it underperformed the IA North America Smaller Companies sector average which returned -2.11%. The fund can have a concentrated portfolio, including exposure to smaller companies. Both of these factors increase risk.
The fund’s struggled as high inflation and rising interest rates have made investors question the future prospects and earning potential of the growth companies it invests in.
The fund also suffered following the US regional banking crisis. A number of the companies owned in the fund in the financial sector sold off after regional banks showed signs of weakness, resulting in some collapsing.
We don’t expect all the funds on the Wealth Shortlist to perform in the same way. We think it’s important for investors to build a portfolio filled with managers who have different approaches and investing styles to help generate long-term returns.
| Aug 18 To Aug 19 | Aug 19 To Aug 20 | Aug 20 To Aug 21 | Aug 21 To Aug 22 | Aug 22 To Aug 23 | |
|---|---|---|---|---|---|
| Baillie Gifford American | 5.18% | 78.14% | 35.42% | -48.46% | 6.36% |
| IA North America | 7.39% | 9.30% | 28.18% | 0.61% | 4.16% |
Past performance is not a guide to the future. Source: *Lipper IM, to 31/08/23.
MORE ABOUT BAILLIE GIFFORD AMERICAN INCLUDING CHARGES
BAILLIE GIFFORD AMERICAN KEY INVESTOR INFORMATION
| Aug 18 To Aug 19 | Aug 19 To Aug 20 | Aug 20 To Aug 21 | Aug 21 To Aug 22 | Aug 22 To Aug 23 | ||
|---|---|---|---|---|---|---|
| Artemis US Smaller Companies | 5.40% | 5.98% | 35.93% | -12.46% | -3.66% | |
| IA North American Sm Companies | 0.95% | 3.27% | 37.06% | -6.39% | -2.11% | |
| Russell 2000 | -7.04% | -3.57% | 43.09% | -2.88% | -3.9% |
Past performance is not a guide to the future. Source: *Lipper IM, to 31/08/23.
MORE ABOUT ARTEMIS US SMALLER COMPANIES INCLUDING CHARGES
ARTEMIS US SMALLER COMPANIES KEY INVESTOR INFORMATION
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Our fund research is for investors who understand the risks of investing and that investing in funds isn't right for everyone. Investors should only invest if the fund's objectives are aligned with their own, and there's a specific need for the type of investment being made. Investors should understand the specific risks of a fund before they invest, and make sure any new investment forms part of a diversified portfolio.