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What's moving markets
The consequences of rapidly rising interest rates started to appear in March, with high profile bank solvency issues as depositors began to withdraw funds.
The first sign of trouble was with Silicon Valley Bank (SVB). As its client base of mainly start-up technology firms began to withdraw their deposits, the bank was forced to sell a large proportion of its long dated treasuries portfolio which, following last year’s rising interest rates, was sitting on large losses. This shook SVB’s viability and the number of deposits above the $250,000 insured limit prompted a bank run. Over $42 billion was withdrawn, shares plummeted, and the bank became insolvent. Two other regional US banks, Signature and Silvergate, suffered similar fates.
This led the market to look for other areas of weakness, and all roads led to a much larger and well-established bank - Credit Suisse. Credit Suisse has had a number of issues dating back to the financial crisis, particularly around governance. Just as events in America unfolded, they announced the discovery of ‘material weakness’ in their accounts. The bank’s largest shareholder stated they won’t provide any more capital, and the share price fell dramatically. This led to a forced acquisition by UBS the following weekend, which is now under investigation.
Increased regulation in the banking sector and the requirement for higher capital ratios since the financial crisis means it’s unlikely this will grow into a wider banking issue. However, tightening financial conditions and weakening growth could cause difficulties for any more leveraged and vulnerable players, so it’s something to monitor.
Meanwhile central bankers are still walking the tightrope between suppressing inflation and avoiding a recession. Headline inflation numbers have largely trended downwards since their peaks last year, but core inflation remains persistent so restrictive monetary policy will likely continue until inflation is fully under control.
The major central banks all increased interest rates during the month. The Bank of England and the Fed both raised by 0.25% to 4.25% and 5% respectively, while the ECB raised its main deposit rate by 0.5% to 3%.
The outlook remains uncertain, with tightening financial conditions likely to lead to suppressed demand and slowing growth, if not a recession, over the coming months. The question is to what extent this is already priced into markets, which could present opportunities for long term investors.
Asset class implications
The banking sector’s issues caused widespread sell offs in equity markets mid-month, until the central banks and regulators calmed markets by insuring client deposits.
The FTSE All Share fared worst, returning -2.84% because of its high exposure to the banking and financial sector. However, it’s still in positive territory year to date.
Despite the fall of one of the region’s largest banks, European equities ended the month in positive territory, returning 0.94%. They’ve also been the best performing asset class over the last 3 months, largely due to a more positive economic outlook following lower energy prices.
US Equities also ended the month in positive territory, with the FTSE USA up 1.38%. This has largely been driven by the tech sector, with many of the traditional FAANG stocks delivering double digit returns after a difficult 2022.
Bond markets were positive over the month too, with the FTSE Actuaries UK Conventional Gilts All Stocks index returning 2.86%, and the broader ICE BofA Global Broad Market index returning 1.05%. This was due to a return of risk-off sentiment after events in the banking sector, and the potential for more accommodative monetary policy on the horizon. While each of the major central banks delivered rate hikes at their most recent meetings, the increases were largely priced into the market by then.
Property continues to underperform, as tighter financial conditions weigh on demand. Several markets have already seen declining commercial property values over recent months, and this will likely continue in the near term, especially in the more leveraged areas.
Given the uncertain economic and market outlook, a more defensive positioning seems prudent. In our Tactical portfolios, we continue to maintain an overweight to both government and corporate bonds, as well as an overall underweight to equities. Within equities, the exception is Emerging Markets, where we have an overweight positioning given attractive valuations and China’s reopening.
|FTSE Actuaries UK Conventional Gilts All Stocks TR in GB
|ICE BofA Global Broad Market Hedge GBP TR in GB
|IA UK Direct Property TR in GB
|FTSE All Share TR in GB
|FTSE USA TR in GB
|FTSE World Europe ex UK GTR in GB
|FTSE Japan TR in GB
|FTSE Asia Pacific ex Japan TR in GB
|FTSE Emerging TR in GB
Source: FE Analytics, GBP total return (%) to last month end
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Parmenion accepts no duty of care or liability for loss arising from any person acting, or refraining from acting, as a result of any information contained within this article. All investment carries risk. The value of investments, and the income from them, can go down as well as up and investors may get back less than they put in. Past performance is not a reliable indicator of future returns.