The first quarter of 2023 proved to be no less eventful than 2022, although despite this, returns for the major asset classes were positive over the period. Market movements, like much of 2022, were mainly dominated by central bank action and rhetoric. The fact that central banks remained very dependent on incoming data (especially around inflation and employment) to determine policy direction only added to the uncertainty and volatility during the period.
January proved to be an excellent month for markets, with both global equity and bond markets rallying strongly during the month. Investor sentiment was supported by several factors, the main ones being declining inflation, ‘dovish’ (looser policy) central bank comments – especially by the US Federal Reserve Chairman Powell – relatively mild weather in Europe (helping to push down energy prices), and China’s reopening after the government abandoned its zero-covid policy late last year. This resulted in markets rapidly discounting the best possible scenario of sharply falling inflation (back to central bank targets), falling interest rates, and a ‘soft-landing’ for economic growth.
A reversal of some of the strong gains experienced in January was seen in February, with both global equity and bond markets falling during the month. Somewhat paradoxically investor sentiment was negatively impacted by strong economic data releases (especially a bumper US jobs report), as markets reverted to the ‘good news’ is ‘bad news’ playbook. Essentially, good news for the economy (particularly employment) implies more persistent inflation, which infers higher for longer central bank interest rates, which is broadly bad news for markets. We also saw higher than expected inflation indicators coming out of US and Europe and subsequent ‘hawkish’ (tighter policy) rhetoric from the Federal Reserve and ECB. If markets started to price in a ‘soft landing’ in January, they moved to expecting a ‘no landing’ (no slowdown) in February.
The end of the quarter witnessed heightened concerns regarding the banking sector in the US and Europe. In the US this was sparked by a classic ‘bank run’ on Silicon Valley Bank (SVB), the 16th largest US bank by assets, which specialised in providing banking services to a niche area of venture capital backed IT start-ups.
While US authorities were very quick to provide deposit guarantees and liquidity to calm the situation, it generated a significant amount of concern regarding the health of other regional banks, in fact banks in general. The jittery market meant that, in Europe, we saw a completely unrelated matter led to a hurriedly arranged takeover of ‘accident prone’ Credit Suisse by UBS. Fears over whether this was 2008 all over again unsurprisingly spread, but reassurances from authorities that banks had more capital and were better regulated, especially large systemically important banks, managed to assuage concerns.
How has this translated to financial markets?
Well despite the volatility it was a good quarter for returns (albeit largely driven by the very strong January), with global equities (+7.0%) rising sharply. The improved energy situation (lower gas prices) benefited Europe ex UK (+8.6%), while UK equities (+3.2%) lagged the most due to its relatively high exposure to financials and energy stocks. In terms of style, the interest rate sensitive growth stocks (+13.8%) outperformed the more value / cyclically (+1.4%) orientated equities by a significant margin. This was to some extent also reflected in sector performance, with Information Technology (+20.5%), Communication Services (+17.2%), and Consumer Discretionary (+14.2%), the best performing areas. At the other end of the spectrum Energy (-2.9%), Healthcare (-1.5%) and Financials (-1.3%) sectors trailed the most.
Within fixed income markets, declining inflation and increased risk appetite (especially at the start of the year) meant all areas generated positive returns. Looking at the detail, global government bond prices rose (+3.0%), on reduced interest rate expectations. Global investment grade credit (+3.1%) generated a positive return over the month as spreads tightened, and at the risker end of the credit spectrum the same was true with global emerging market debt (+2.2%) and global high yield (+3.6%) also rallying strongly.
In terms of real assets, the more economic sensitive property markets underperformed equities over the period with the global REITs index up +1.0% over the period. Global listed infrastructure (+4.0%) also lagged equities, but to a lesser degree, demonstrating its more defensive qualities. Commodities (-5.4%) overall declined during the quarter, however, there was significant divergence across the different markets. Gold (+8.1%) was the brightest area in terms of returns, helped by a weaker US dollar and declining interest rate expectations. While agricultural commodities were broadly flat, Industrial metals (-2.1%) and Crude Oil (-5.2%) declined, reflecting lower demand prospects due to slowing economic growth concerns towards the end of the period.
|INDEX||END FEBRUARY VALUE||END MARCH VALUE|
|DJ Ind. Average||32656.70||33274.15|
|£ Base Rate||4.0||4.25|
This month’s values quoted as at 31/03/2023. The above values are sourced from Bloomberg and are quoted in the relevant currency.
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Investments can go down, as well as up, to the extent that you might get back less than the total you originally invested. Exchange rates also impact the value of your investments. Past performance is no guide to future returns. Any individual investment or security mentioned here may not be suitable, and is included for information only and is not a recommendation. You should always seek professional advice before making any investment decisions.