March Market Commentary 2023

11 Apr 2023 | Investment Updates
March Market Commentary 2023

The biggest news from March was the troubles in the banking sector, and we covered the immediate aftermath of the collapse of SVB in the middle of the month. Since then, markets have broadly recovered from the initial concern to end Q1 with positive returns. Global markets were up approximately 7% in the first quarter, with the tech-heavy Nasdaq 100 returning over 16%.

This month, we briefly cover the banking sector again, the ongoing fight against inflation, the UK Spring Budget, and we look at attractive investment opportunities for your portfolio in the current environment.



Banking Worries

At the beginning of March, markets had already been trepidatious about the interest rate environment, particularly as Fed Chair Jay Powell mentioned that the central bank might need to raise rates again – higher and faster to combat inflation, with data on jobs, spending, and inflation signalling an overheating economy. Then came the collapse of SVB following its inability to meet withdrawals due, in part, to unrealised losses on its government bond portfolio. SVB had been buying long-dated government debt, which is sensitive to interest rate rises. With the rapid pace of rate hikes, lots of banks are sitting on unrealised losses of this sort, and so an impact such as this on a bank with talk of more aggressive hiking again puts markets on edge.

We won’t cover SVB in detail here (see our update from March 14th), but it did cause immediate panic across banking stocks. Fortunately, it seems to have been contained, and the market downturn only lasted for a week before confidence returned. SVB had its own idiosyncratic problems, as did Signature Bank, which led both to collapse under these conditions. There doesn’t yet appear to have been contagion in the wider banking sector, with the largest, systemic banks well capitalised to meet any issues. Investors will, however, be carefully watching interest rate policy not just for how it may combat inflation or cause a recession but what it means for the banking sector, whose unrealised losses could grow if bond values continue to decline (although year-to-date the S&P US Government Bond Index is up 3.88%).

JPMorgan Chase CEO, Jamie Dimon, has also cautioned that a crisis for the US banking system is “not yet over”, although he noted that “this is nothing like 2008”. There is likely to be an impact on smaller regional banks in the US, which could affect SMEs’ access to capital and banking services, but the larger banks could benefit from this as they buy up struggling regional banks.

The other big news in banking was the rescue of Credit Suisse by UBS, in a deal brokered by the Swiss government. The Credit Suisse story should be more concerning than SVB but didn’t generate the same headlines (banking in Silicon Valley for the tech sector must have been a more appealing news story). Credit Suisse is one of the largest banks in the world and is considered systemically important to global banking. It also was sitting on large unrealised losses from its bond portfolio, although once again, it had several of its own issues to contend with, going back years.

2014 saw Credit Suisse plead guilty to allowing US clients to evade taxes. It was an underwriter for Luckin Coffee’s IPO on the Nasdaq in 2019, with the Chinese company then found to have fraudulently inflated its sales. There were scandals with top officials in 2020. In 2021, the US hedge fund Archegos Capital collapsed, costing the bank $5.5 billion. The bank was convicted last June of failing to prevent money laundering after a Bulgarian drugs gang used the bank for its profits from cocaine trafficking.

All in all, Credit Suisse has been in poor shape for some time. What ultimately caused its downfall was that, despite receiving a $54 billion credit line from the Swiss National Bank, its largest shareholder, the Saudi National Bank, refused to inject any more capital. This allowed rival UBS to snap up the bank for $3.3 billion, well below its market value. Interestingly, bondholders were given lower priority than shareholders in the deal. The Swiss regulator is now investigating the speed of the takeover, but UBS will now look to cut tens of thousands of jobs in Credit Suisse worldwide and turn the bank around. UBS will now have around $5 trillion in assets under management.

We will continue to keep an eye on the banking sector, but our investment propositions have low exposure to financials and should not be impacted by these specific events. Markets have rallied following the initial concerns.


Inflation and Interest Rates

The US personal consumption index (inflation ex-food and energy) rose less than expected at 0.3% in February’s data, with year-on-year running at 4.6%. The Fed raised interest rates by a further 0.25%, and it will be interesting to watch how the banking issues discussed above affect their policy moving forwards. Chances of a ‘hard landing’ and a recession appear to have increased by recent events in the US.

European inflation slowed from 8.5% in February to 6.9% in March as energy prices fell back. However, core inflation, which does not include food and energy, rose to a record high of 5.7%. The ECB had raised its main rate by a further 50 basis points to 3.5% and looks likely to continue with its current rate hiking policy.

The Bank of England made its 11th straight interest rise, moving up another 25 basis points to 4.25%, the highest level since 2008. Inflation remains particularly sticky in the UK, although economic growth of 0.3% in January was a positive start to the year, beating expectations of 0.1%.


The Spring Budget

Jeremy Hunt unveiled his first Budget as Chancellor of the Exchequer. Many of the points have already been telegraphed in his Autumn Statement, so there were few surprises, except when it comes to pensions. Tax breaks on pensions were expected, but Hunt went further than many expected. The Lifetime Allowance (the amount up to which you can save in a pension before additional taxes apply), which was previously set at just over £1 million, was abolished altogether. Ostensibly, this is to encourage senior doctors to stay in the NHS for longer. Many doctors retire early since they do not want the tax penalties of going over their LTA, but this move by the Chancellor has not targeted just doctors but everyone. With polling suggesting that a Labour government is more likely at the next general election, there is a good chance that the LTA will return after a couple of years. So we anticipate that anyone with previous LTA issues in their pension will be maximising saving as much as they can into pensions without penalty. The annual allowance for pension contributions that can have tax relief claimed has also risen from $40,000 per year to $60,000.

The other headline news from the Budget was an increase in corporation tax for profits over £250,000 from 19% to 25%.

Other news saw the UK join the 11-nation Comprehensive and Progressive Agreement for Trans-Pacific Partnership. Nations in this bloc include Australia, Japan, and Canada. This is a win for the Brexiteers, who can now champion leaving a united trading bloc on its doorstep so they don’t have to adhere to its rules and forge its own path. Instead, they can comply with the rules of a smaller trading bloc on the other side of the world that will add 0.08% to GDP over the next decade (also, don’t look at the queues in Dover, but if you do look, that’s nothing to do with Brexit either…).


In Other News

China’s Manufacturing PMI rose to its highest level since 2012, indicating a strong rebound for the economy since the lifting of Covid restrictions.

Alibaba announced plans to split its $200 billion empire into six business units, which promises to lead to several IPOs. Founder Jack Ma also made a rare public appearance in Hangzhou, having kept a low profile since criticising China’s financial regulator in 2020.

Arm, the British semiconductor company, decided against an IPO on the London Stock Exchange and is aiming to list in the US.

Sheikh Tahnoon, the UAE’s national security adviser and head of its largest bank, is becoming Chairman of Abu Dhabi’s $790 billion sovereign wealth fund.

South Africa’s GDP shrunk by 1.3% in Q4 of 2022 compared to the previous quarter. Rolling blackouts in the country are estimated to have cost the economy $50 million a day.

The world’s largest cryptocurrency exchange, Binance, is facing a civil lawsuit from the Commodity Futures Trading Commission in the US. The CFTC alleges much of Binance’s trade and profit comes from the US, but the company has never registered with them and “disregarded” financial laws. Binance has denied this, with the CEO calling the complaint “unexpected and disappointing”.


Investment Opportunities

There is still plenty of noise around a potential recession. Rate hikes have not brought inflation down sufficiently as yet, leading investors to be concerned about a ‘hard landing’ in the US. Our view is still that the picture should be clearer in the second half of the year, but given the recent rally with the potential for more volatility in Q2, now is starting to look like a great time to invest in the market. As Warren Buffet says – “when others are greedy, be fearful; when others are fearful, be greedy”. We cannot time the market, but getting in just before the recovery begins in earnest could prove to be very fruitful. Yes, there may be some short-term volatility to ride out, but a long-term investor should look at current conditions as a fantastic opportunity.

We also believe strongly in alternative assets to complement your conventional portfolio. We are widening our investment offering to clients to include asset classes that do not correlate to traditional equity and bond markets and can produce strong returns for your portfolio. These include Venture Capital and Private Equity, private debt, algorithmically traded FX funds, hedge funds (including long/short equity strategies and commodities exposure), structured products, fine art and property.

To learn more about these strategies and which best works in your portfolio to meet your objectives, please speak to your Financial Planner.


BlackRock Investment Institute
atomos, via VAM Funds
Fidelity International
Canaccord Genuity Wealth Management