The recent banking crisis in the US has sent shockwaves through the economy, with many experts predicting that it could have a significant impact on the luxury market. The crisis was brought about by a number of factors, including the collapse of several large financial institutions, the subprime mortgage crisis, and a general lack of oversight and regulation in the banking sector. As a result, many consumers have been left with less disposable income and a decreased appetite for luxury goods. This could spell trouble for high-end retailers, who may see a decline in sales as a result of the crisis. However, some luxury brands have been able to weather economic downturns in the past by focusing on quality and exclusivity, and by targeting high-net-worth individuals who are less likely to be affected by economic turbulence. Ultimately, the full impact of the banking crisis on the luxury market remains to be seen, but it is likely to be felt by retailers and consumers alike in the months and years ahead. Solitaire International spoke to two top diamond analysts, Paul Zimnisky and Pranay Narvekar. Read on to know more about their views on the same.
How do you anticipate the recent US banking collapse to impact the diamond industry?
Paul Zimnisky: In my opinion the collapse and subsequent restructuring of Silicon Valley Bank as well as a handful of other regional US banks was a somewhat isolated instance and I do not believe we will see a systematic problem like we had a decade and a half ago. Importantly, depositors were bailed out which quelled worst-case-scenario fears. That said, the risk of a larger financial system problem is certainly elevated and will probably remain so for at least the next year.
Silicon Valley Bank, in particular, catered to the tech industry in California, so the direct impact on the diamond and jewellery trade should be relatively limited to those operating in that market. I do think the event will inevitably lead to curtailed lending overall in the economy which will slow economic growth and of course, have a knock-on effect for the larger diamond industry.
Pranay Narvekar: Currently, there have been a few instances of banks collapsing in the US. However, the US Fed seems to have managed to limit the damage. Specific bank issues might cause localised problems, but unless there is a systemic banking system collapse in the US, it is unlikely to have a major impact on the industry. A major collapse, on the other hand, will significantly impact GDP and growth and, in turn, the diamond industry demand.
Which segments of the diamond industry do you think will be hit the hardest by the banking collapse? How might it affect the diamond supply chain – from mining to manufacturing to retail?
Zimnisky: I think the impacts on the diamond supply chain will be indirect. Of course, the recent banking problems transcend the US, for example, in Europe Credit Suisse had to be rescued, so the result of this will be tighter credit conditions and more regulation which will hinder global economic growth. The global economy is still dealing with higher-than-normal inflation which makes the situation that much more complicated. All of this said, my prediction is that the slowdown will be more of a softer landing, albeit bumpy. I don’t think a global economic collapse is in the cards this time.
Narvekar: A banking collapse or a major recession (even without a systemic banking collapse) will have major implications on the entire diamond pipeline. US accounts for over half the consumer demand, and any drop in demand there will ripple through the entire pipeline over a period of time. There will be an immediate impact on retail, which will be increasingly amplified upstream along the pipeline.
How might the banking collapse affect diamond prices and demand?
Zimnisky: If the global economy can muster any positive growth this year, I think diamond prices will be supported, especially with the likely escalated disruption in Russian diamond supply in the later parts of this year.
Narvekar: As mentioned a systemic banking collapse will ultimately affect consumer demand for diamonds. The prices are essentially a reflection of how this demand shock flows through the pipeline and will depend on the actions taken by various people along the pipeline. For example, if the producers decide to reduce production, prices will be supported, and any drop could be short lived.
What role do you think government policies can play in mitigating the impact of the banking collapse on the diamond industry?
Zimnisky: I actually think the diamond industry, especially the mid-stream segment, is in a much stronger financial position than in the recent past. If credit conditions in the industry were still as precarious as a decade ago, I would be a lot more concerned about the unfolding volatility in the banking system.
Narvekar: Governments can play a constructive role during a bank crisis, by ensuring the continued flow of credit to the industry, through the banks. In times of crisis, if banks pull back on credit, it can cause panic selling in the markets as companies struggle for liquidity, thereby further amplifying the crisis. Ensuring a continued flow of credit to companies in the sector will make sure that there is no panic selling of stocks, and stabilise prices, which, in turn, will enable the industry to come out quicker once the crisis abates.
How will it affect consumer confidence in purchasing diamonds?
Zimnisky: Diamond and jewellery spending will inevitably slow as the economy slows and as lending is curtailed. That said, the employment situation, in the US at least, remains quite stable which is very supportive of discretionary consumption. If we see the employment situation deteriorate rapidly in the coming months, that would be concerning, however, I do not expect that to happen at this point.
Narvekar: As such, a banking crisis will cause a much wider economic crisis, and lead to a bloodbath in many industries and sectors, with significant job losses as well. This economic pain will get reflected in the demand for diamonds. There is little to suggest that a banking crisis will significantly impact the consumer confidence in diamonds specifically. In any case there are other factors like the emergence of lab-grown diamonds, increasing ESG and traceability requirements, etc. which are playing out in the markets, and which have a larger potential impact on the consumer confidence in diamonds.
Are there any potential opportunities for the diamond industry that may arise as a result of the banking collapse?
Zimnisky: The problems in the banking system should be deflationary which means that central banks can maybe ease off on the aggressively tighter economic policy that has been implemented over the last year. Loser economic policy tends to be conducive of economic growth and consumer spending.
Narvekar: As in any crisis, the companies with a strong balance sheet and access to finance will come out stronger. This, in turn, will mean that the ranks of smaller and mid-tier companies could be further thinned and, in turn, benefit larger companies. Companies could use the pricing mismatches to make opportunistic purchases in the market and strengthen their position.