Market Analysis Mar 2023

The collapse of Silicon Valley Bank in March, coupled with UBS Group's subsequent takeover of Credit Suisse, emerged as the hallmark events of Q1. These occurrences triggered a sell-off in US and European financial sectors, as fears of a systemic banking collapse loomed large. Silicon Valley Bank's downfall stemmed primarily from inadequate risk management, underscoring challenges posed by tighter monetary policies. Credit Suisse's woes predated its demise, with revelations of financial reporting deficiencies and market stress sealing its fate. Such events might usher in stricter lending criteria, potentially impeding growth in developed economies.

Concerning market performance, global equities in sterling terms, as gauged by the MSCI World NR Index, garnered a return of 4.81% over Q1 2023. Developed markets outperformed emerging markets, which are more susceptible to US interest rate hikes. The reopening of China's economy kindled optimism in emerging markets, yet escalating US-China tensions acted as a counterforce.

While UK equities had outperformed global markets in 2022, they exhibited a lag in Q1 2023. The FTSE All-Share Index delivered a positive return of 3.08%, but retreated from its February peak due to banking sector woes and economic uncertainties.

Similarly, US equities slightly underperformed global equities, with the S&P 500 notching a 4.58% gain in sterling terms. Notwithstanding market turmoil triggered by Silicon Valley Bank's downfall and associated contagion risks, technology stocks experienced notable upswings. Technology, communications, and consumer discretionary sectors emerged as frontrunners globally. Eminent companies like NVIDIA, Meta Platforms, Apple, Amazon.com, Microsoft, and Alphabet contributed significantly to the positive performance.

European equities outshone global counterparts, with the MSCI Europe ex UK Index recording an 8.89% gain in sterling terms. However, the real estate sector exhibited underperformance due to apprehensions about feeble occupancy rates and escalated financing expenses.

The growth investment style took the lead, with the MSCI World Growth Index achieving an 11.98% gain in Q1. Conversely, the MSCI World Value Index incurred a -1.82% loss. Large-cap stocks surpassed mid and small-cap stocks, a trend commonly observed during periods of economic uncertainty.

Within the bond arena, the Bloomberg Global Aggregate Index yielded a return of 0.21% in sterling terms. The year began on an optimistic note, with buoyant economic growth driven by China's revival, dwindling energy costs, and signs indicating that inflation might have peaked. Nonetheless, surging yields in February, propelled by projections of extended elevated interest rates and inflation concerns, precipitated a surge in government bond values as investors sought safer havens.

UK and US government bond yields dipped over the quarter, as UK gilts and UK inflation-linked bonds reaped returns of 2.05% and 4.30%, respectively. UK corporate bonds registered a 2.38% gain, while US corporate bonds recorded a 0.69% rise in Q1.

Central banks sustained their rate hikes during the quarter. The Federal Reserve unveiled two 25bps increases, the Bank of England announced 50bps and 25bps hikes, and the European Central Bank implemented two 50bps hikes.

The S&P GSCI, a gauge of commodity prices, witnessed a 7.52% decline in the quarter. Energy and livestock sectors were among the worst performers. The energy market saw a decline due to a mild winter and substantial reserves in Europe. In sterling terms, industrial metals experienced negative performance, while gold exhibited positivity driven by persistent inflationary pressures.