May 4th, 2023 | 05:54 CEST
Bank quake and crack-up boom: Deutsche Bank, First Republic Bank, Tocvan Ventures
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"[...] China's dominance is one of the reasons why we are so heavily involved in the tungsten market. Here, around 85% of production is in Chinese hands. [...]" Dr. Thomas Gutschlag, CEO, Deutsche Rohstoff AG
First Republic: A special case
Only recently it was announced that consumer prices within the Eurozone rose by 7% in April. After a short breather, this is a renewed acceleration of inflation. Food and energy, in particular, hit the headlines. These figures could lead the European Central Bank (ECB) to keep the monetary reins tight even longer than expected. This decision would be easy for the monetary guardians were it not for the situation of the banks. In the US and also in Switzerland, institutions have already been wound up because of problems in the course of the interest rate turnaround. Although institutions such as Deutsche Bank are considered much less at risk than First Republic Bank or Credit Suisse, industry experts point out that risks lie dormant deep in bank balance sheets that could only gradually come to light.
Deutsche Bank: Sitting out the sour period
While the interest rate turnaround is putting pressure on bond portfolios in particular, such portfolios are additionally hedged with futures and other derivatives. In some cases, banks also have derivatives on their books for which the respective institution has no underlying. In these cases, there is no classic hedging transaction, which in the worst case is a zero-sum game, but there are price risks, especially in times of interest rate reversals. If the banking quake were to spread further and affect not only regional banks or already troubled institutions, such as Credit Suisse, but also big players, counterparty risks could be added. If a counterparty in unsecured derivative deals defaults, the instruments become worthless. If such incidents accumulate, the entire market could grind to a halt.
In addition, illiquid securities in bank balance sheets are usually not valued on a daily basis. On the one hand, this gives the opportunity to ride out a sour period, as is currently the case, but it also carries the risk of a rude awakening if securities are sold at a discount, and there is suddenly a current market price. The resulting need for write-downs could exacerbate the current banking crisis. Fortunately, it currently looks like large institutions can cope with the situation. Central banks are also ready to provide support. Although interest rates are likely to continue to rise moderately, at least within the Eurozone, the monetary guardians are simultaneously launching bond-buying programmes to stabilize the stumbling markets. At the beginning of the year, the ECB had bonds worth the equivalent of EUR 5 trillion in its portfolio. Since these securities are also suffering from rising interest rates, the central bank is in a dilemma despite its staying power.
Tocvan Ventures: Crisis profiteer with cost advantages?
In order to resolve this dilemma, central banks could be forced to take even greater risks and relieve banks, as they have in the past. Since over-indebted economies and companies would also benefit at the same time, such a step could be appropriate in the case of declining inflation. When central banks last opened the floodgates in 2020 in the wake of the pandemic, this led to a market rally. Besides bank shares, classic safe havens such as the precious metals sector could also benefit this time. The Canadian company Tocvan Ventures operates two promising projects in Mexico. The Pilar project recently convinced with high gold and silver grades. The El Picacho project benefits from its proximity to the San Francisco mine and is also considered promising. Since Tocvan Ventures enjoys cost advantages in Mexico - CEO Brodie Sutherland has in the past cited costs that are about a quarter lower than in other mining regions - the stock has also jumped in recent weeks.
However, the value must still be considered largely unnoticed. While the market is currently paying close attention to banks and growth companies, stocks like Tocvan Ventures are still trading under the radar. Since Tocvan Ventures, as an exploration company, is speculative and valued at a risk discount, the stock could offer itself as a portfolio addition for a possible crack-up boom, i.e. a bull market in the wake of high inflation and support measures by central banks. Investors should continue to watch the share; the chart also looks promising.
While banks are still under pressure and a recovery rally is only to be expected after comprehensive measures by the central banks, commodity stocks are already solidly supported. Precious metals have played to their strengths in the past, especially during crises. Second-tier stocks hold above-average potential in the event of a crack-up boom.
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