Quarterly Investment Review Q1 2023

Welcome to the Quarterly Investment Review for Q1 2023.

Our Investment team have put together a range of resources to update you on what has happened in markets across the first quarter of 2023. Here you will find: 

  • High-level, global equity performance analysis
  • Soundbites from our team of investment experts
  • A written summary covering the quarter's main market events

Global Equity Performance Analysis:

The graph below shows global equity performance across the quarter and plots world events along the performance line to indicate their impact on markets.

Hear from our Team - Investment Soundbites

Hear from our team of Investment Managers as they each explore an important topic from the quarter.

James Fitzpatrick, Head of Funds: How Realistic is the Electric Vehicle Revolution?

James Penn, Head of Equity: The Banking Sector - Is The Contagion Contained?

Chris Bell, Investment Manager: Has Inflation Hit Its Peak?

Summary & Outlook - Q1 2023:

It was a strong start to the year for global equity markets as supply chain issues eased following the end to China’s zero Covid policy. The European economic outlook has been improved by a mild winter, which helped to alleviate high energy prices. Wage growth slowed and inflation showed signs of moving in the right direction with prices in the US falling in January and the Federal Reserve’s preferred inflation measure, Personal Consumption Expenditures, 0.5% below expectations.

Labour markets were undeterred with a whopping 517,000 US jobs created in January, while unemployment was at its lowest since 1969. As the quarter progressed, consumer sentiment improved, retail sales surprised to the upside and purchasing managers indices signalled a return to economic expansion.

It was, to some extent, a tale of two halves. The downward momentum in US inflation slowed, while Europe’s core inflation failed to rollover. Consequently, there was a resurgence in hawkish commentary from western central banks with Federal Reserve Chair Jerome Powell summing up neatly, “the ultimate level of interest rates is likely to be higher than previously anticipated”.

In March, the world of finance was rocked by the second and third largest bank failures in US history, Silicon Valley Bank and Signature Bank. The Federal Deposit Insurance Corporation guarantees deposits up $250,000 but elected to protect depositors in full to avert a run on deposits at other small, regional US banks. Just a week later, following intervention from the Swiss government, Credit Suisse was acquired by UBS to prevent the bank from failing. The Swiss National Bank has assisted the takeover with CHF100bn of liquidity and certain guarantees on losses.

We don’t expect a repeat of 2008. The reaction from regulators has been swift and commendable. We may see that central banks around the world moderate their language about the need for further rate hikes, and indeed increase interest rates by less than currently anticipated, which would help markets significantly over the course of the rest of the year. We are comforted by the fact that the Federal Reserve was aware of the evolving situation at Silicon Valley Bank for over a year and had placed the company under supervisory review. It also appears that few European banks exhibit similar risk characteristics owing to more stringent regulation – Credit Suisse has been badly managed for some time; its demise has not been all that sudden.

Equity markets recoiled as a result of these events but have improved into the end of the quarter. US equities gained 6.5%, UK equities rose 2.0% and European equities were up 9.2%. The tech heavy NASDAQ index was the best performing major equity market, gaining 16.2% as markets anticipate a peak in the interest rate hiking cycle. Fixed income assets have returned near 3% across the board so it has been a good quarter for assets overall, despite some fear creeping in more recently.

We have been cautious into 2023 with the view that central banks will be looking for coincidental or even lagging indicators that confirm inflation is being tamed before changing the course of their aggressive policy. However, there is now cause for more caution from central banks and commercial bank lending should begin to tighten, doing some of the work for central banks from here. Furthermore, by mid-July, we will have lapped the 3 largest month-on-month US inflation prints in this cycle, so there should be considerable downward pressure on prices.

Sentiment may greatly improve in the near term and economic data has improved markedly, ahead of likely recession in the second half. We have therefore become more positive in our outlook but anticipate the need to realise profits from equity markets should they continue with upward momentum.

Disclaimer: The views, thoughts and opinions expressed within this article / videos are those of the authors / speakers and not those of any company within the Capital International (CIG) and as such are neither given nor endorsed by CIG. Information in this article / video does not constitute investment advice or an offer or an invitation by or on behalf of any company within the Capital International Group of companies to buy or sell any product or security or to make a bank deposit.

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