World markets summary:
March began with the collapse of Silicon Valley Bank (and several smaller US regional banks) as fears of a wider 2008-09 banking crisis rippled through markets, eventually culminating in the take-over of European giant Credit Suisse.
Whilst issues in the US appear to have been concentrated to unique risk taking in less-regulated US regional banks, in Credit Suisse’s case, the timing of their results was unfortunate and led to an old-fashioned crisis of confidence. UBS has since acquired Credit Suisse and central banks have acted swiftly and decisively to reassure markets.
The fact remains that UK and European banks are much better capitalised than in 2008 and have stronger balance sheets than in the past, including better reserve ratios.
Bond yields fell precipitously in the month as the banking crisis evolved with two year treasury yields falling over 1% in a three week period. Investors flocked into US technology with the pace of interest rate hikes expected to slow and the market now pricing in interest rate cuts by year end.
Economic data remained strong in the month, particularly in Europe.
In emerging markets, China unexpectedly cut interest rates to increase liquidity in the system and stimulate growth.
The Federal Reserve’s (Fed) balance sheet once again increased this month as banks borrowed to ensure liquidity.
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Our weightings are based on sterling as a base currency.
United Kingdom (UK)
Amid the noise in the banking sector, Chancellor Jeremy Hunt’s new budget went almost unnoticed. Help has been extended for energy bills and in order to attract people to the workforce, childcare allowances have been added while the lifetime allowance in UK pensions has been scrapped.
Economic data was mixed in the month with retail sales unexpectedly surging and UK consumer confidence rising to the highest level in a year. On the other hand, UK house prices fell at the largest annual rate since 2009 in continuing signs of a housing slowdown. However, mortgage approvals, which are a sign of future borrowing, picked up for the first time since August 2022.
Despite the banking sector turmoil, the Bank of England increased the UK base rate by 0.25%, pushing borrowing costs to fresh 2008 highs. This was in response to UK inflation unexpectedly increasing in the month for the first time in four months, as a result of upward price pressures in food.
Sterling held up well in the month now at £1.23 against the US dollar, making it one of the best-performing currencies in the first quarter of 2023.
United States (US)
Despite the collapse of Silicon Valley Bank, it was a strong month for major US markets this month with the Nasdaq up nearly 10% and the S&P 500 up 3.7%. Q1 marked the ninth best quarter in the Nasdaq’s history as bond yields, inflation expectations and interest rate expectations all fell. Core Personal Consumption Expenditure Price Index, which is the Fed’s favoured inflation measure, came in lower than expected and unemployment claims also rose. This boosted markets late in the month.
The Fed raised interest rates by 0.25%. This was as many market participants expected, however, in light of the banking situation, some thought it best to pause. It now looks as if the Fed are finished raising rates, with the potential for one more 0.25% hike at the next meeting.
It is worth noting that the US is still the only major developed market that trades on a valuation premium to its historic average and the events surrounding Silicon Valley Bank mean that banks will be more reluctant to lend. The resulting effect of this will be a slowdown in the US economy and this may be the catalyst to take the US into recession.
European markets ended the month marginally up, as fears present during the banking crisis subsided and led to a late surge in the final week of the month.
The market recovery was also helped by positive underlying data. The warm weather continued to cause a fall in natural gas prices, enabling the Eurozone Composite Purchasing Managers Index, which combines services and manufacturing activity, to unexpectedly move further into expansionary territory. Meanwhile, Eurozone consumer confidence managed to shrug off the banking crisis to remain close to the highest level in over a year. This suggests the Eurozone is on track to grow 2% for the year. Inflation easing more than expected will also be supportive for growth and financial markets, as it will reduce the need to raise interest rates.
The euro strengthened against the US dollar over the month, as the need for further interest rate hikes is comparably lower in the US.
Asia and Emerging Markets
Performance was mostly positive in March with stock markets in Japan and Hong Kong both up 3%, and South Korea up 2.65%, whilst Shanghai was flat and Brazil, which was one of the only poor performers, was down close to 3%.
China’s online commerce leader, Alibaba, surprised many by announcing plans to split its $220 billion empire into six units that will individually raise funds and explore initial public offerings. A planned Alibaba overhaul could serve as a template for a restructuring of China technology itself. This was in the same week that Alibaba founder, Jack Ma, came back to China after months abroad and the shares were up 15% on the restructuring news.
Despite some signs of slowing growth in the West, Chinese manufacturing activity continued in expansionary territory for the third consecutive month as the world’s second largest economy continues to recover post the Covid-19 reopening. China’s central bank also made a surprise cut to interest rates which should act to stimulate growth and provide liquidity to the system.
Even though economic data is generally holding up better than expected in developed markets, emerging markets are set to grow at a quicker pace this year and we are therefore expecting more profit upgrades than in developed market peers.
Yields tumbled over the month as markets were roiled by the collapse of Silicon Valley Bank in the US, the forced sale of Credit Suisse in Europe, and the crises of confidence that swept through the Western banking system in general. For example, US Two Year Bond Yields had the sharpest rally since the infamous Black Monday in 1987.
In addition to the action within the banking sector, investors interpreted Bank of England and Federal Reserve communiques as hints that further interest rate rises may not be as forceful as anticipated before the banking issues. Language from the European Central Bank was slightly less reassuring but European yields fell anyway.
In the environment described above it was no surprise that high yield bonds underperformed government bonds in the month, delivering a small loss as investors fretted about an impending credit crunch as banks in general, but US regional banks in particular, slowed the flow of loans to the real economy in response to clients withdrawing deposits. It should be added that Central Banks took decisive action in order to try and rebuild confidence and that by the end of the month the situation had calmed down somewhat.
Oil prices had a very volatile month in March, reaching their lowest level since December 2021, before recovering some of the losses towards the end of the month. The price weakness culminated from the fear that the banking crisis would deepen the economic slowdown and equate to a dampening of oil demand.
Gold had a very strong month of performance, easily recovering from the February decline to reach close to US $2,000, the highest price level in a year. The strong performance resulted from the anticipation of fewer interest rate rises, consequent US dollar weakness and investors continuing to utilise gold’s safe haven status in the environment of ongoing uncertainty.
UK house prices declined in March by a greater extent than was forecast, registering the sharpest decline since 2009. The 3.1% price decline now leaves the average house price at £257,122, 4.6% below the August 2022 peak.1 The price fall can be largely attributed to the greatest cost of living crisis in a generation and mortgage rates remaining elevated since the mini-budget in November 2022. Stickier than anticipated inflation maintains the requirement for further interest rate rises, which will prevent mortgage rates from falling in the near-term. Therefore, we believe that demand is likely to remain low and the downward trend in house prices is likely to continue in the coming months.
1 Nationwide House Price Index, 31 March 2023
All Index data figures are sourced by Morningstar and correct as at 31 March 2023, unless otherwise stated.
The value of investments or any income arising from them may fluctuate and are not guaranteed. Past performance is not necessarily a guide to future performance.