In this month’s investor update, head of portfolio management Pacome Breton, answers questions on the health of the banking sector, why central banks are torn on future policy, and the performance and positioning of Nutmeg portfolios.
So far, 2023 is proving to be an eventful year for investors. How did markets perform in March?
March was a busy month for markets. Some regions fared better than others, but globally, performance was flat to slightly positive.
US equities were the best performers on a regional basis, along with emerging Asia. In the US, the Nasdaq rose more than 9%, pushed higher by a rebound in tech companies. Among emerging markets, which grew around 3-4% in the period, Southeast Asia, China, Taiwan, and South Korea had a strong month and, like in the US, were pushed higher by the size and strength of tech-related stocks in their respective indices.
But the month was mixed, with some markets experiencing negative performance. This was the case for European and British stocks, which had performed strongly in the first two months of this year. European indices, for example, were relatively flat, while the UK’s FTSE 100 fell 4.6%, its worst month since last September.
If we look at fixed income, it was a more favourable month for corporate and government bonds. Macroeconomic events pushed bond yields lower and bond prices higher in the US and in the UK.
So, which events stood out for you in March? What did you make of the problems impacting the banking sector?
There are months when you look back and it seems very little happened, and there are months when it seems so much has happened that it could have filled an entire year. March was definitely in the latter camp.
The fallout from the failure of Silicon Valley Bank – which was up to recently the 16th largest bank in the US – was a meaningful event with regards to the speed of its collapse and the fact that it was the first bank of significant size to fail since the global financial crisis of 2008.
In Europe, the problems faced by Credit Suisse – and its subsequent bailout by UBS – sparked fears of broader fragility in the banking sector. What stunned investors was the speed at which Credit Suisse needed to be rescued, but the market impact was ultimately limited.
March was also a period of intense central bank activity. The European Central bank lifted interest rates by a further 0.5%. The Federal Reserve and the Bank of England also hiked rates by 0.25%, pushing their main target rates to 5% and 4.25% respectively.
With all this news, data around inflation actually got less publicity than usual but shouldn’t be ignored. While the recent trend has been for inflation to be lower and even to surprise on the downside, this wasn’t totally the case in March.
General consumer price indices (CPI) data in the US was lower, registering at 6.0% year-on-year versus 6.4% the previous month. However, core inflation, removing food and energy, moved from 5.6% to 5.5% – so a very modest decrease and less than anticipated by analysts, giving limited room for the Fed to become more accommodative in the near future.
In the UK, the numbers were more shocking, with inflation accelerating from 10.3% to 10.6%. The more problematic core inflation rose from 6.0% in February to 6.3% in March on a year-on-year basis.
Are you worried about another potential banking crisis? Can recent events influence whether central banks continue raising rates?
We do not believe that there are significant risks of another banking crisis at this time.
While the difficulties of Silicon Valley Bank and Credit Suisse may seem quite similar due to their timing, they fell into distress for very different reasons. Credit Suisse had been in difficulty since the global financial crisis, and in the end, lost the confidence of its shareholders.
The case of Silicon Valley Bank and other US regional banks is more symptomatic of the current environment and the actions of central banks over the last 12 months, which have undertaken rate tightening at a pace not seen since the 1980s. Most US regional banks are hurting from higher interest rates, lower levels of deposits, and the general negativity in the sector over the month.
With regional banks in the US responsible for a significant portion of the loan financing for both corporates and households, the impact on the economy itself in the US is not expected to be positive.
With regards to central banks, policymakers remain somewhat torn. On the one side, inflation is proving more resilient than anticipated, and the economic and employment data remain supportive, so they need to continue raising rates. Conversely, difficulties in some parts of the banking system mean that they might want to pause to assess the situation further.
Inflation remained core in their thinking in March. The impact of all recent hikes could start to be felt in the coming weeks, which may raise questions about the path forwards for the hiking cycle.
Despite all this turbulence, why do you think global markets overall were so resilient in March?
March was a fascinating month in terms of market performance. The fact that, on a global level, markets ended the month roughly flat was quite extraordinary. Especially in the US, where indices were positive, even after the worries we saw in the regional banking sector.
This is the paradox of global markets, at least in the short-term. The bad news for US financials may reduce access to credit for corporates and households and therefore impact future growth. However, markets were still positive. Future expectations for interest rates dropped quite significantly, which pushed rate-sensitive stocks higher, in particular those linked to growth sectors such as technology.
So, ultimately, what drove market resilience was the hope that central banks will soon finish raising interest rates. A year of rate rises has weighed on market sentiment, so signs that these may be coming to an end helped markets regain some buoyancy at the end of the month.
On the flip side, the price of oil, which is sensitive to future demand and growth expectations, was down quite significantly, reflecting anticipation of lower future growth.
After such an eventful month, how did the portfolios perform?
The Nutmeg portfolios have been relatively flat overall with some intra-month volatility. Lower-risk portfolios performed slightly better, pushed higher by the performance of fixed income, while higher-risk portfolios were on average flat to slightly negative, impacted by equities and currency movements.
We modestly increased our allocation to the US dollar during the month across all our portfolios, reflecting the potential for the currency to remain attractive in a lower growth environment with higher interest rates.
In general, volatility remains elevated in both fixed income and equities. It is hard to predict when central banks will pause their hiking cycle as inflation moderates and growth slows, and the effects of higher rates start to be felt across the economy.
On our side, we remain cautiously positioned and slightly underweight in terms of both bonds and equities. Current valuations, where we are in the growth cycle, and future central bank action means we still remain cautious. With all that in mind, we are ready to update our views and our portfolios more significantly when opportunities arise.
The Nutmeg investor update is available as a podcast. Listen to this month’s update below.
About this update: This update was filmed on 4th April 2023. All figures, unless otherwise stated, relate to the month of March 2023.
Source: MacroBond, Nutmeg and Bloomberg.
As with all investing, your capital is at risk. The value of your portfolio with Nutmeg can go down as well as up and you may get back less than you invest. Past performance and forecasts are not reliable indicators of future performance.