Share prices have bounced back after a series of problems in the banking industry in both the US and Europe. Meanwhile, the risks of a mild recession have increased.
Market moves that matter
Bank failures and takeovers
The strong start to 2023 for stock markets came to an abrupt halt in the second week of March following the collapse of Silicon Valley Bank (SVB), which is the biggest banking failure since the 2008 financial crisis.
However, the market turmoil was short-lived after the US government stepped in to protect deposits. Local US banks Silvergate and Signature also failed, while Swiss bank UBS agreed to take over Credit Suisse despite initial reservations.
Recession fears mount
Recession seemed to replace inflation as the number one fear in March. Banking sector stress has reignited the risks of an economic contraction, with economists now pencilling one in for the end of the year. US economic data published in March was far more mixed than previous months.
Inflation remains stubbornly high, although employment conditions are strong despite high interest rates. Tighter financial conditions from more cautious banks are also likely to depress the pace of economic growth.
Inflation remains high
Despite all the financial contagion risks, the Bank of England, US Federal Reserve and European Central Bank increased interest rates in March. Inflation expectations have been falling in recent months, but could rise again if rates are cut before price rises are tamed.
Global inflation numbers came down in February, but core inflation remained worryingly high. The annual rate of inflation dipped to 6.0% in the US and unexpectedly jumped in the UK to 10.4%. The US market has started pricing in interest rate cuts, with only one more hike expected this year.
Investment views
Stock markets wobble
Stock markets fell in the second week of March on fears of financial contagion from the failure of SVB, before stabilising. UK shares also dropped, underperforming most other markets due to large exposures to financial and energy companies. When investing in stock markets, we continue to proceed cautiously.
Last month we felt markets had risen a little too rapidly at the start of 2023. Although we hadn’t expected the US banking sector catalyst, we weren’t surprised to see falls in March. Yet share prices are no longer rising and falling in unison, so as financial conditions tighten, careful stock selection is needed now more than ever.
Government bonds may still have plenty to offer
It feels like the best opportunities in fixed income markets may have passed for now. However, we believe government bonds and investment grade corporate bonds still offer the potential for much better returns than they did 12 months ago.
Martin Lawrence, Director of Investments at Wesleyan, said: "We see value in commercial property for well-located buildings with strong letting prospects. That’s because the returns we expect to receive compared with government bonds are sufficiently compensating us for the extra risks involved in property management."
We believe equities continue to look attractive
Technology shares in the US had a better month on optimism of lower future interest rates. The oil price fell in March on demand concerns from slowing economies later in 2023, although recovered after the world’s largest producers said they would limit production*.
The reopening of China showed up in stronger than expected purchasing managers’ data, but how sustainable will it prove if the global economy slows? Geopolitical concerns could also return soon with tensions between the US, China and Russia never far from the headlines. Over the longer term, we continue to expect attractive returns from equities.
* Thomson Reuters