Quarterly Investment Update

Markets started off the year on a strong footing shrugging off turmoil from the banking crisis that unfolded in March, as inflation and interest rates discussions continue to dominate the market.

US equities were higher, with the S&P 500 gaining 7.03%, as investors lowered their expectations regarding the Federal Reserve’s future interest rate path. Since the start of the year, the Fed hiked rates twice by 25bps, and signalled that there is further way to go. However, investors seemed to ignore that and by the end of March markets were pricing that the hiking cycle will end below the rate the Fed was communicating, and even priced in that rate cuts would start as soon as Q3. Lower inflation readings seemed to support investors’ rhetoric, as February’s US CPI increased by 6%, vs 6.4% in January, although core CPI came in at 5.5% slightly above expectations. Economic reports pointed towards a resilient US economy as Q4 2022 annual GDP grew by 2.9%, while the labour market shows little signs of cooling down. However, the failure of Silicon Valley Bank in March, and the subsequent disruption in several US regional banks, revealed how fragile areas of the economy are to the Fed’s aggressive tightening campaign. This quickly raised recession fears amongst investors who rushed to buy Treasuries and money market instruments, driving bond yields down and bond prices up. The quick intervention of US authorities to guarantee deposits and extend credit to struggling institutions calmed down fears, and further supported investors’ expectations that the Fed would need to dial back on rate hikes to avoid a recession. Technology stocks (that are the most sensitive to interest rate hikes) gained the most as the Nasdaq Composite Index appreciated by 17.05%, while the banking sector suffered losses with the KBW Banks Index losing 17.93% over the year.

Financial turmoil quickly spilled over to Europe, as Swiss lender Credit Suisse was bought by its rival UBS in a deal brokered by the Swiss authorities, following a massive exodus of depositors and investors after revealing “material weakness” in their financial reporting. However, investors treated the Credit Suisse event as a “one-off” incident, with eurozone’s financials sector ending Q1 on the upside. Similarly, the EURO STOXX 500 rallied and posted gains of 19.28%. The outperformance of European equities over US stocks, was attributed to the reopening of the Chinese economy, a number of positive economic data, and alleviated investors’ fears in regards to potential oil supply shortages over the winter that had dragged European equities down over the last year. Overall inflation showed signs of cooling from 8.5% in February to 6.9% in March, but core inflation delivered an upside surprise and rose from 5.6% to 5.7%. While the ECB hiked interest rates twice by 50bps, President Christine Lagarde said “The risks to the outlook for economic growth have become more balanced,” noting that supply pressures were easing. Germany’s 10-year yield decreased from 2.65% to 2.29%, in line with other bond markets.

In the UK the FTSEE rose by 2.42%, supported by brighter economic data revealing that the UK economy grew by 0.1% instead of contracting as forecasted. Similarly, while the Bank of England said that it still expects the UK to fall in a recession in 2023, that would be a shallower one than it had originally predicted. In addition, Britain’s government run an unexpected budget surplus in January, reflecting strong income tax receipts. However, inflation proved stronger than expected, increasing to 10.4% in February, up from 10.1% in January, due to strong domestic demand, making BoE’s job on combating inflation even harder after already having raised interest rates by 50bps in February and 25bps in March.

In Sweden, the OMX 30 rose by 8.83%, in light of positive January economic data including an improved economic sentiment, increased industrial output and a 2.0% month on month expansion in GDP, the strongest expansion in four months. However, forecasts from the European Commission indicate that Sweden could be the only European Union member state to experience a full-year contraction this year in light of increasing rates aimed at tackling inflation. Bankruptcies in Sweden increased by 11% in February for the seventh consecutive month with retailers squeezed by declining household consumption and the construction industry struggling in the wake of an ongoing housing market rout. At the same time, inflation increased further in February to 9.4% up from 9.3% in January with the depreciation of the Swedish krona further adding to inflationary pressures. Riksbank responded by delivering another rate hike of 50 bps in February and it has indicated another hike by 25 or 50 basis points in April.

In China, the CSI 300 gained 4.67% in Q1, despite escalating US-China tensions as sentiment was supported by the loosening of the country’s Covid-19 restrictions. Equities gained further support after Chinese authorities revealed a number of measures to support the property market and lessened their regulatory crackdown on China’s technology companies. China’s GDP grew 2.9% YoY in Q4 2022, exceeding consensus forecasts. The re-opening of China’s economy also supported Emerging Markets that delivered positive results over the quarter but lagged behind the MSCI World Index. Finally, Japanese equities also enjoyed gains as the Bank of Japan left their policy unchanged ahead of the upcoming appointment of the new governor Kazuo Ued in April.