14 April 2023

Quarterly Market Update: Are we seeing the green shoots of a recovery?

At a glance:

  • Markets experienced broadly positive performance last quarter
  • Although there were bank failures, this hasn’t led to a wider sector collapse, and diversification helped smooth some of the volatility this caused
  • Wider economic performance doesn’t always move in sync with investment performance

After witnessing war, disease and drought over the past few years, the spectre of banks beginning to fail wouldn’t have been welcome news last quarter.

Rising interest and inflation had helped put pressure on markets in general, and earlier this year these pressures claimed two victims. In early March, Silicon Valley Bank (SVB) was told to shut its doors by US regulators. This was followed a few days later by Swiss banking giant Credit Suisse collapsing, which eventually ended in its sale to its former rival UBS.

While some may have braced for another Lehman Brothers moment, thankfully this has been avoided. The world is now a very different place compared to 2008. Regulations are far tougher; banks have more stringent liquidity rules, and the reaction of governments was markedly different this time around.

Looking at the banking sector more widely, prices certainly took a bit of a hit at the start of March, although many are still trading above where they started the year. Of course, we’re not out of the woods yet, and we continue to monitor this area closely.

We often say that a diverse investment portfolio can help mitigate some of the volatility you see in markets. These failures were a great example of why we believe in this approach. The maximum combined exposure to both banks in any of our funds was just 0.13%. In other words, you may have noticed a dip in your investments from wider market reactions, but you were relatively insulated compared to if either of these banks had made up a significant proportion of your holdings.

When bad news is good news

Outside the banking sector, the last quarter also provided a good example of why wider global news doesn’t always align perfectly with your investment returns.

In 2022, the aforementioned war combined with high inflation and increasing interest rates helped drag down markets for much of the year. This was especially true for tech stocks, many of which fell significantly from their post-pandemic highs.

So far in 2023, the war has continued to rage in Eastern Europe. Inflation has remained stubbornly high and interest rates have continued to rise. GDP growth remains slow and recessionary fears haven’t gone away.

Even though many of the same factors that helped drag down markets last year still exist, markets have gone through something of a recovery since the start of the year. For example, the US NASDAQ index, which is heavily weighted towards technology shares and suffered greatly in 2022, performed extremely well.

You may have noticed many of our articles contain a disclosure along the lines of ‘past performance is not indicative of future performance.’ Looking backwards has its use cases but, ultimately, you’re not investing for yesterday’s returns, you’re investing for your financial future. And wider financial markets are exactly the same.

Inflation is high today, and interest rates may continue to rise for a little while longer, but experts are more interested in what they’re going to do. In general, interest rates and inflation are expected to fall later in 2023, quite dramatically in some cases.

This has led to a slightly unusual situation where markets have reacted positively to certain types of seemingly negative economic news.

Central banks have been increasing interest rates to try and bring down inflation. Higher interest rates help slow spending, which in theory slows inflation by reducing the demand compared to supply. It also helps slow the economy. So, when US jobs data comes out, showing that the market is cooling a little, this suggests the US economy will slow down in the future, and the Federal Reserve won’t need to increase interest rates so much.

One side effect of the global downturn last year is that it has provided our active fund managers with something of an opportunity. Even after the modest recovery since the start of this year, many companies are still trading at attractive prices. We expect our fund managers to be searching for opportunities across the market where resilient companies are well placed to provide attractive long-term returns.

Since the start of the year, the market is showing the seeds of recovery. The UK and US have so far avoided a recession. Bond yields have become more attractive following the various rate increases, and equities have also performed relatively well. However, it would be a mistake to think we’re out of the woods. The IMF might have given an improved outlook on the UK’s economy, but it still predicts a 0.1% GDP shrink of 2023. Both equities and bond yields remain nervy, and recent years have shown just how unpredictable short-term events can be.

Past performance is not indicative of future performance. The value of an investment with St. James’sPlace will be directly linked to the performance of the funds you select, and the value can therefore go down as well as up. You may get back less than you invested.

SJP Approved 13/04/2023

By Matthew Forbes