Reproduced with permission from Brooks Macdonald.
Global equities rose in March as inflation cooled further, raising hopes that major central banks were close to pausing their policy tightening cycles. Anxiety about a possible global banking crisis, as three US lenders failed (Silvergate Bank, Silicon Valley Bank, Signature Bank), and Switzerland’s Credit Suisse faced liquidity problems, pressured markets. However, quick action from regulators and Swiss bank UBS’ takeover of Credit Suisse in particular, helped to calm investor nerves. Oil prices dropped as the banking turmoil caused uncertainty.
UK stocks fell on fears about a global banking crisis, while an unexpected increase in consumer inflation – the annual rate rose to 10.4% in February from 10.1%1 in the prior month – further dampened sentiment. However, a more positive mood in the second half of March helped to limit the overall losses. The Bank of England, which raised interest rates by 25 basis points (bps) to 4.25%2, was somewhat more positive as it said the UK economy was unlikely to slip into a recession this year. Sterling strengthened against the US dollar during the month. The Asset Allocation Committee (AAC) have a positive outlook for UK equities, supported by an investment style skew towards larger-capitalised, UK value exposures.
US equities increased on relief that a banking crisis had been averted. Inflation data was mixed during the quarter. The US annual Consumer Price Index (CPI) inflation for February fell as expected, but the month-on-month core CPI (excluding typically more volatile categories of food and energy), saw an unexpected increase to 0.5%3. In March, the US Federal Reserve increased rates by 25bps to a range of 4.75-to-5.0%4 and insisted that it would continue to tighten policy, as long as needed. The economy continued to add jobs, with non-farm payrolls rising more strongly than expected in February. The US dollar weakened on expectations the Fed was close to pausing its rate hikes. The AAC have a neutral outlook for US equities, coupled with an investment style growth skew, supporting our standalone and longer-term investment themes of technology, healthcare, and sustainability.
European markets gained as the easing threat of a banking meltdown sparked a rally towards month end. Optimism that major central banks might be close to halting policy tightening further lifted sentiment. Inflation data continued to offer mixed messages – while headline eurozone consumer annual inflation rate cooled in February, the core rate (excluding food and energy) rose to a new cycle high of 5.7%5. The European Central Bank increased its deposit rate by 50bps to 3.0%6, although it gave little indication about future moves. The euro weakened against sterling and strengthened against the US dollar in March. The AAC have a neutral outlook for Developed Europe (excluding UK) equities, raised from Negative in March. This more constructive outlook was prompted by a backdrop of falling energy prices, exposure to China’s rapid economic reopening, as well as a structural tailwind of higher interest rates providing an improved margin outlook for the region’s banks.
Japanese shares moved higher as they benefitted from the improved global mood in the second half of the month. The annual core inflation rate (excluding fresh food prices but including fuel costs) eased to 3.1% in February from 4.2%7 the previous month, marking the first slowdown in over a year. The so-called ‘core-core’ rate, which excludes fuel costs, also rose in February. Fourth-quarter GDP growth was downgraded to an annualised 0.1% from an earlier estimate of 0.6%8, as the economy only just escaped a recession. The yen strengthened against the US dollar during the month. The AAC have a neutral outlook for Japan equities, coupled with an investment style growth skew.
Asia-Pacific equities (excluding Japan) strengthened, in aggregate, as worries about a banking crisis abated. Chinese shares gained as the National People’s Congress held its annual meeting at which President Xi Jinping kept several key finance officials in their posts. China also set out their GDP growth target for calendar year 2023 at around 5%, which would represent an acceleration from the International Monetary Fund (IMF)’s estimate of 3% growth in 20229. Australia’s market edged down as concerns about the wider financial system and declines in commodity prices hurt sentiment. The AAC have a positive outlook for Asia Pacific (excluding Japan) equities, alongside a value skew exposed to China economic re-opening tailwinds.
Emerging markets moved upwards as the US dollar weakened. Indian stocks dropped, while Brazilian shares were pressured by President Luiz Inácio Lula da Silva’s criticism of the country’s central bank, which continued to hold interest rates. South Africa’s market benefitted from a strengthening of the rand against the US dollar. Turkish equities declined as the country began rebuilding after February’s earthquake and ahead of a general election. The AAC’s neutral outlook for Emerging Market equities disguises a more cautious outlook to the mix of emerging countries outside of our preferred Asia focus.
Yields on core government bond markets fell (prices rose, reflecting their inverse relationship) as worries about the banking turmoil encouraged investors to seek the perceived safety of fixed income. In corporate debt markets, US investment-grade and high-yield spreads widened amid the uncertainty caused by volatility in the banking sector. The AAC guide towards a short-duration bias within the fixed income allocations.
1 UK Office for National Statistics (ONS). Report published 22 March 2023. https://www.ons.gov.uk/economy/inflationandpriceindices/bulletins/consumerpriceinflation/february2023
2 Bank of England. Report published 23 March 2023. https://www.bankofengland.co.uk/.
3 US Bureau of Labor Statistics (BLS). Report published 14 March 2023. https://www.bls.gov/news.release/cpi.nr0.htm
4 US Federal Reserve (Fed). Report published 22 March 2023. https://www.federalreserve.gov/newsevents.htm
5 Eurostat. Report dated 31 March 2023. https://ec.europa.eu/eurostat/statistics-explained/index.php?title=Inflation_in_the_euro_area.
6 European Central Bank. Report published 16 March 2023. https://www.ecb.europa.eu/press/pr/date/2023/html/ecb.mp230316~aad5249f30.en.html
7 Reuters news report dated 23 March 2023. https://www.reuters.com/markets/asia/japans-consumer-inflation-off-41-year-high-stays-above-boj-goal-2023-03-23/
8 Bloomberg, 8 March 2023 (https://www.bloomberg.com/news/articles/2023-03-08/japan-economy-expands-less-than-thought-showing-weak-momentum)
9 Reuters news report dated 6 March 2023. https://www.reuters.com/world/china/chinas-economy-government-revamp-focus-parliament-set-open-2023-03-04/
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