Investing & Performance | 11 April 2023
Monthly update: Markets rise as banking concerns ease
Global stocks rose after government intervention helped calm market jitters.
WHAT’S HAPPENING IN FINANCIAL MARKETS?
It was a bumpy ride for markets in March with the banking sector coming under notable stress. Global markets sold off when Silicon Valley Bank (SVB) collapsed, causing investors to become concerned about the credibility of the wider sector. SVB’s problems have been blamed on the fall in the value of its US bond holdings caused by rapid interest rate rises over the past year.
Other announcements that caught the attention of markets included Credit Suisse’s takeover by UBS as its long-standing issues resulted in a loss of customer confidence in the bank. These developments were concerning and authorities reacted quickly to calm market jitters and global stocks surged towards the end of the month.
While rising rates are taking their toll on certain sectors in the United States, the US Federal Reserve is not signalling a knee-jerk reaction to lowering them in the near future, according to Monique Wong, Head of Multi Asset Portfolios at Coutts. She said: “Despite the events that have taken place in the US as a result of rising rates, the Fed has said that bringing down inflation remains a top priority.
“Year-on-year inflation in the US has been falling each month, albeit still above the Fed’s target of 2%. With that said, we do believe that we are approaching the peak of interest rates.”
In contrast, UK inflation has risen unexpectedly again, putting pressure on the Bank of England to raise rates further.
WHAT DOES THIS MEAN FOR YOUR INVESTMENTS?
Although we didn't predict this sequence of bank stress events, our portfolios were already positioned conservatively, given the recessionary outlook. For example, we’re defensively positioned on equities, and our holdings include an allocation to healthcare which holds up relatively well in a high inflation as well as recessionary environment. We also have a strategically high allocation to government bonds, which have returned to their portfolio protection role and provide useful diversification.
Most of the interest rate hikes are now in the rearview mirror, with one more increase likely this year in the US. Much will depend on economic growth and inflation data from here. With the tightening cycle slowing, the market narrative shifts from inflation to recession.
The stress in the banking sector has increased the likelihood of tighter bank lending conditions and by extension, an increased risk of US recession.
Monique notes: “Historically, stock markets have a tendency to trough before the low point in the economic cycle and can start recovering during the downturn. Therefore, recessions can provide the investment opportunities of assets at attractive valuations.”
THIS MONTH’S SPOTLIGHT: TRADES ALLOCATING TO EMERGING MARKET EQUITIES AND US TREASURIES
We have reduced our exposure to US equities on the back of a weaker outlook for US company earnings, and used some of our cash allocation to buy US government bonds and emerging market equities.
Easing inflation and higher yields makes US Treasuries more attractive than cash. The US is further along the interest rate hiking cycle, and the expectation of a pause in rate hikes should also benefit bonds.
The Purchasing Managers’ Index (PMI) data indicates that emerging market and Asian economies are leading the rest of the world in terms of their growth outlook. We expect the reopening of the Chinese economy to provide a further boost, and the possibility of a peaking US dollar supports our increased allocation to emerging market equities.
Coutts’ clients can find out more about what’s happening in the investment markets and how it impacts their investments by speaking to their private banker.
Past performance should not be taken as a guide to future performance. The value of investments, and the income from them, can fall as well as rise and you may not get back what you put in. You should continue to hold cash for your short-term needs.