Q1 2023 Market Commentary

20/04/2023

Global Markets

Global equities had a positive start to the year, with the MSCI ACWI gaining 4.4%. The broad concern of a recession that dominated market sentiment in the previous quarter cooled somewhat in Q1, causing most markets across the globe to post positive returns. The much-publicised collapse of Silicon Valley Bank (SVB) in March did not stop the S&P 500 from finishing the quarter up 4.6%, as a slowdown in the rate of inflation fuelled hopes that interest rate hikes may end sooner than initially anticipated.

UK equities posted a positive quarter, with the FTSE 100 finishing up 3.6% as the domestic economy proved to be resilient, despite inflation remaining high. The Office for National Statistics (ONS) revised upwards its Q4 GDP estimate, showing that the UK had avoided a technical recession. Despite this positive development, the Bank of England has stated it still expects the economy to fall into recession later in 2023. European equities also posted gains in Q1, despite the banking turmoil that led to the acquisition of Credit Suisse by UBS.

US-China relations saw renewed tensions, as a Chinese high altitude balloon was shot down over US airspace. Despite this, Chinese equities managed to outperform global markets over the quarter with the China All-Shares index up 5% - helped by Beijing's decision to loosen COVID-19 restrictions and reopen the economy. Emerging markets lagged behind global markets, with a gain of only 1.1% for the quarter. An ongoing electricity crisis in South Africa caused the region to underperform, and India also posted negative returns over the quarter, in part due to allegations of fraud directed towards the Adani Group.

Equity Styles

Quality and Value stocks outperformed Global Markets over the quarter – up 10.8% and 5.5% respectively. Momentum stocks were the laggard in Q1, being the only factor to post negative returns (-1.1%). The current hiking cycle by central banks has resulted in investors preferring to own companies with strong fundamentals and consistent profits, common screens for Quality stocks. The Momentum index has a high weighting to previously strong performing sectors, Energy and Health Care, which struggled over the quarter, as well as being underweight Information Technology, the quarter’s strongest performing sector.

Inflation

Hopes of easing inflation stalled in the UK in February, as the year-on-year CPI print came in at 10.4% in February, up from 10.1% in January. The continued rise of inflation led the Bank of England to hike rates twice over the quarter, 50bps in January and by 25bps in February. US CPI continued to decline, falling to 6.4% in January and to 6% in February, its lowest year-on-year figure since September. The Fed continued its monetary tightening cycle, hiking by 25bps twice so far in 2023. Eurozone inflation also remained elevated but continued to fall from 8.6% in January to 8.5% in February. The ECB remained more hawkish than other key central banks and raised rates by 50bps twice over the quarter.

Fixed Income

Corporate bonds enjoyed a positive start to the year as fears over a deep recession subsided towards the end of 2022 and investor sentiment improved. High Yield bonds outperformed Investment Grade over the quarter, rising 3.0% compared to 2.7%, as investors felt more comfortable taking additional risk with the slightly improved economic backdrop.

Despite some fears of inflation remaining elevated and the continued rate hikes from a number of Central Banks, government bonds rallied towards the end of the quarter. This was likely in part due to the collapse of SVB and subsequent worries within the banking sector, causing investors to seek the safe haven of government bonds as fears of contagion spread.