This week sees the end of the first quarter of 2023. March has thus far been eventful to say the least, however, relative calm returned to markets this week. The lack of further contagion (so far) within the banking sector has helped alleviate some pressure in markets and we have seen equities rebound accordingly.
One of the implications of the banking woes has been for the markets to price in lower terminal interest rates and interest rate cuts towards the back end of 2023. This has been supportive for sectors such as technology, which tend to command higher valuations in a lower interest-rate environment. The tech-heavy US Nasdaq 100 index fell over 30% in 2022, but has seen a very strong rebound, rising nearly 2% this week and around 17% for the first quarter. This is in complete contrast to the energy and banking sectors, which enjoyed very strong rises last year, but have fallen in 2023.
It was a quiet week in terms of economic data, with most of the news flow centred around the UK and Europe. Inflation data from the Eurozone showed the year-on-year inflation rate fall to 6.9%, lower than expected and lower than last month’s figure of 8.5%. The European Central Bank (ECB) is likely breathing a sigh of relief to see inflation continue to fall. Central banks in general are caught between a rock and a hard place, trying to bring down inflation without toppling over the economy. This lower-than-expected inflation data may allow the ECB to ease up on future rate hikes. Staying with Europe, German employment data showed the unemployment rate in Europe’s biggest economy nudged up from 5.5% to 5.6%.
There was mixed data from the UK. Finalised Q4 GDP data showed the economy grew 0.1% in the final quarter, having previously been reported at 0% growth. The data meant that the UK economy grew 0.6% for 2022, which is considered below-trend growth. House price data highlighted that higher interest rates are now impacting home values. Nationwide house price data showed prices had declined by 3.1% over the last 12 months. House prices have been expected to fall given that the sharp rise in interest rates has driven up the cost of mortgage debt servicing. The impact will be a negative wealth effect and could be detrimental for consumer confidence and spending.
Richard Hughes, chair of the Office for Budget Responsibility shared his views on Brexit, saying it had a big detrimental impact to the UK economy, estimated to be around 4% of economic output. However, there was some positive news for the UK economy by the end of the week with reports that PM Sunak was close to agreeing a trade-deal with the Pacific bloc.
While the first quarter of 2023 may not have felt that positive, portfolio returns have been pleasing. From a portfolio construction standpoint, its’s been welcome to see equities and bonds behave differently in recent weeks, something that did not occur last year. The reversal in equity market leadership in 2023 is a reminder of why we try and stayed balanced and diversified across equity style and region.
Andy Triggs, Head of Investments
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