The fastest rate-hiking cycle in decades claims its first casualties
March was the month that saw the financial repercussions of higher rates finally starting to bite, although there had been other warning signs. The UK pension fund crisis last September was an earlier example of what can happen in response to the fastest rate-hiking cycle in decades. The world had become used to ultra-low interest rates for a long period, and it was no great surprise that some institutions were ill prepared for a return to more normal levels.
Three US banks fall in ten days, then Credit Suisse follows
A mini crisis in the financial sector claimed three mid-sized US banks in the space of ten days. This was followed by the shotgun wedding of Credit Suisse to rival UBS in Europe, sparking a global sell-off in bank shares as investors worried about who might be next. US policymakers moved quickly to limit the fallout, announcing a range of support measures that included a guarantee for all depositors and a temporary lending programme to supply liquidity wherever needed.
Markets were also soothed by a sharp decline in bond yields on hopes that the Federal Reserve might postpone plans for a rate hike to avoid further financial stress. By the end of the month bank stocks had stabilised and most markets closed broadly flat. However, UK equities declined 3%, hampered by a relatively high exposure to financials and other cyclical stocks.
Elsewhere, the oil price jumped 8% on the back of a surprise cut in oil production by OPEC. The price of gold also rose sharply, clearing the important $2,000 level to touch a new all-time high.
Growth weakens as tighter credit compounds the slowdown
Following a series of surprisingly strong economic data for January, more recent readings painted a picture of weaker growth that, compounded by tighter credit conditions following the bank failures, increased the odds of a global recession. The US labour market finally started to slow: a surprise jump in the number of official vacancies in February saw job openings rise above 10 million for the first time since May 2021. Growth in wages also slowed to 2% year on year, down from a peak of 8% in April 2022. Headline inflation dropped from a recent peak of 9.1% to 6.0%.
In contrast, the UK inflation figures were particularly poor. Consumer prices rose by 10.4% year on year, an increase from 10.1% for the previous month, with gains driven by an eye-watering 18% jump in food prices. Going forward, the rate of inflation should finally start to decline as year-on-year comparisons for energy prices become less demanding. However, the OBR's forecast of a fall to 2.9% by the year-end was looking increasingly optimistic. On the flip side, the economy and earnings continued to fare better than expected.
Rates continue to rise, but at a slower pace
Central banks continued to raise rates across major economies but downgraded the magnitude to 0.25% in most cases. The key takeaway was that the outlook for growth might well be slowing, but the battle with inflation was not yet over.
A note from the desk
I am pleased to share our monthly update on market events. The overview seeks to summarise market movements together with our views and the rationale for the positioning of investments going forward. As always, should any aspect of this commentary prompt a question, we would welcome the conversation.
Martyn Charlwood · Managing Director
Contagion appears contained, but policymakers face a dilemma
At the time of writing it appeared that contagion from the banking drama had been contained. SVB and Signature Bank were speciality banks, overly focussed on technology start-ups and the crypto space. Poor internal risk management compounded their problems. Financial sector balance sheets are generally much more robust than in the lead-up to the last financial crisis, with regulators requiring a much greater capital buffer. Central banks also demonstrated that they would not hesitate to act if required.
These events created a dilemma for policymakers: should they pause and assess the implications of recent hikes on financial sector stability and the wider economy, or continue the fight against inflation, which was not yet won? Investors were once again betting that they would capitulate soon, but further evidence of a slowdown would likely be required for this to occur.
The UK economy was proving resilient despite much anticipated weakness. Retail sales continued to grow, suggesting that as long as consumers have jobs they will keep spending. Only a few months earlier the Bank of England was telling us that the economy was at the start of what would be the longest downturn since the global financial crisis. It then predicted that a recession would be avoided altogether and expected unemployment to remain flat. It is hardly surprising that markets were confused.
Central banks have demonstrated they will not hesitate to act if required.
Despite increased volatility, global equity markets delivered positive returns for the year to date and remained up strongly from October's low. Over that time they weathered elevated inflation, hawkish central banks, the threat of a recession and now a mini banking crisis. Having increased exposure to equities in October we were content to wait for fresh opportunities before committing any remaining cash.
The investment landscape has undergone much change over the past year and continues to evolve. As old leaders have faltered the baton is being passed to the new growth drivers.
Patience with remaining cash
Having increased exposure to equities in October, we are content to wait for fresh opportunities before committing remaining cash. Markets have weathered elevated inflation, hawkish central banks and a mini banking crisis, and remain up strongly from their lows.
Looking beyond the US for the next cycle
It is less likely that the US will lead the next cycle in financial markets. We believe that once current uncertainties start to recede, there will be material opportunities in areas such as Japan, Asia and emerging markets.
Gold as a diversifier
Exposure to gold is providing positive returns and diversification while we wait for the macro outlook to clear. Gold's surge to a new all-time high above $2,000 underlines its role as a safe haven during periods of financial stress.
Positioned for multiple outcomes
Our portfolios are positioned to weather a number of potential outcomes. The combination of value-oriented equities, gold and careful cash management provides resilience across a range of scenarios for growth and inflation.
Important information
This article is a marketing communication intended for general information only. It does not constitute personal advice, a recommendation, or an offer to buy or sell any investment. If you are unsure whether an investment is suitable for your circumstances, please seek personal advice.
Past performance is not a guide to future performance. The value of investments and any income from them can fall as well as rise. Capital values are at risk and not guaranteed. Forecasts and views expressed in this commentary represent our assessment at the time of writing and are subject to change.
To discuss how this commentary applies to your own portfolio, we would welcome a conversation.
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