Market update – Quarter ending 31 March 2023

2023 started positively as capital markets experienced their strongest January gains in recent years. The ‘risk-on’ sentiment resumed as inflation continued to moderate in developed regions (with easing energy and food prices the most obliging) and peak interest rates moved back into focus. In the US, headline inflation cooled for a sixth successive month to 6.5% year-on-year (y/y) in December from 7.1% a month earlier. The market upswing was also supported by China’s economic re-opening and the possibility of further fiscal and monetary support from central government. In fixed income, bond yields fell after encouraging news on the inflation front.

The strong early advances from January were slightly overturned in February as resilient economic data led many to reassess their expectations for both the peak in interest rates and the subsequent pace of rate cuts. Labour market data was particularly damning, with a half-decade low in the US unemployment rate and strong US jobs growth leaving investors second-guessing the prevailing disinflation narrative. US payrolls increased by over half a million in January, far exceeding consensus expectations of around 200,000 and nearly doubling December’s total, while US retail sales also surprised to the upside – posting an increase of 3.2% month-on-month. In the UK and Eurozone, risks of a deep recession decreased significantly on the back of falling energy prices and an improved economic outlook. Elsewhere, a re-escalation in US-China tensions and a resurgent US dollar posed a slight mid-quarter headwind for emerging market equities.

The collapse of Silicon Valley Bank (SVB) and resulting concerns around the financial sector more broadly, hit bank shares hard in March. SVB found themselves in hot water after they were forced to sell their investments at a loss to cover large depositor outflows. US federal regulators were ultimately forced to intervene by setting up a short-term lending facility to guarantee deposits and limit the risk of contagion on other regional banks. Government bonds rallied as a flight to safety trade occurred, while the wider impact on equity markets was largely restricted to the financial sector. Despite stresses in the banking industry, the US Federal Reserve (Fed) forged ahead with raising rates by a quarter percentage point for the second time in Q1 – bringing it to a target range of 4.75% – 5% at quarter end. Regardless of another turbulent ride, all major asset classes posted healthy returns in Q1 except global listed infrastructure and commodities (with the latter negatively impacted by a dip in energy prices).