In the first three months of 2023, investment markets were like a rollercoaster – going through twists and turns to ultimately end ‘up’ and on a steady platform, ready for the next part of their journey.
In this update, we’ll reflect on some of the key events during the period.
‘Banking on’ Banks?
Stock markets got off to a strong start in January, with factors such as China’s re-opening helping to boost confidence. Many investors believed that inflation rates had peaked, leading to optimism that an end to central bank interest rate rises was on the horizon. This backdrop helped to push equities and bonds upwards.
February saw a slight dip in optimism, following key central bank moves. The Bank of England, the Federal Reserve in the US, and European Central Bank (ECB) all chose to raise their interest rates once again, as part of their long-running battles against inflation. Disappointingly, however, March saw the collapse of Silicon Valley Bank and Signature Bank in the US, which pushed investment markets into a downward spiral. Fears of contagion, and a potential repeat of 2008’s Global Financial Crisis, led to a very bumpy ride for most assets, with equities, and particularly bank stocks, suffering noticeable short-term losses. Investors’ fears were exacerbated when Credit Suisse – one of the world’s largest financial institutions – required rescuing by rival powerhouse UBS, in a deal supported by the Swiss government.
Following the takeover announcement, it took markets some time, but they started to get their nerves under control. Professional investors such as our Fund Managers expected this because, crucially, banks have much more capital and industry regulators have more stringent controls in place than they did during the Global Financial Crisis. Both of the US banks that collapsed were specialist businesses too, so the impact across the global banking sector – despite its interconnected nature – was limited.
Pleasingly, despite all the background noise, most major asset classes saw small, positive gains in Q1, which was good news for our funds.
An Economic Lens
Economic data in the UK was stronger than had been expected during the period, with retail sales – one indicator – slightly higher than forecast. The unemployment rate and job losses rate remained stable too, which was a similar situation to what could be seen in the US. However, while these are positive signs in themselves, a downside is that wages and pay rises have remained at high levels. This matters because wages in the ‘private sector’ act as a barometer of inflation pressure and persistence. If inflation stays high or starts to rise, central banks may have little option but to continue down the path of raising interest rates. That scenario wouldn’t be helpful for already-stretched businesses and consumers.
While recessions appear to be less likely in the US, Eurozone and the UK than they were just a few months ago, the risk remains. The UK stock market’s value reached a record high in February, which was given a lot of media attention; however, remember that it is merely a stock market index and should not be confused with the broader UK economy. According to data from the Office for National Statistics, the UK economy did not contract in Q4 2022, meaning it managed to avoid a technical recession, but the Bank of England still expects this eventuality on home soil later this year.
Our Fund Managers and Outlook
Our Investments team believes that any recessions in the UK and abroad should be less severe than previously thought, but they also anticipate a rise in unemployment rates in key markets. Coupled with banks reining in lending, this could put more strain on economies because the less money that people have available, the less they can spend on goods and services.
Stock markets focus on the future and try to anticipate what lies ahead. As valuations become more favourable, our team will continue to push into overseas markets, to diversify our portfolios. As always, our Fund and Property Managers, Analysts and Sustainable Investment professionals will continue to use their expertise to identify investment opportunities that they believe will produce the best possible long-term returns for everyone who invests in our funds.