Current Topics in Markets
While markets over the past month continued to be obsessed with the inflation outlook and the likely trend in interest rates, a significant new variable entered the picture in March – bank liquidity. The rapid rise in interest rates in 2022 brought about significant balance sheet stress for a number of second tier US banks as their bond holdings fell sharply in value. This led to a shortlived run on certain banks, forcing the Federal Reserve to step in and provide an implicit guarantee to depositors. Meanwhile in Europe, the unrelated but long running problems of Credit Suisse came to a head forcing the bank to be sold in a rescue deal to UBS. These events inevitably led to a short term crisis of confidence in banking and gave central banks significant pause for thought in terms of their plans for further rate rises. While further increases are virtually certain, these are likely to be more measured than previously thought with the result that the peak in rates may well be lower than might have been expected a few short weeks ago.
The March ‘banking blip’ inevitably brought some market volatility with it, affecting both bonds and equities., causing equities to weaken through the month and bonds to generally move in the other direction. As things stand, it is hard to see markets settling on a particular direction for some yet and we continue to expect the next few months to be volatile.
Most of the major equity markets followed the same pattern over the course of March, weakening over the first half and then regaining their losses over the second half. China fared worst, despite its relative cheapness, but its situation has been complicated by some disappointing trends post its covid reopening and by political uncertainties. Outside of China, however, there is a good investment case to be made for many of the emerging markets – low inflation, little threat of recession and buoyant economic outlooks. The outlook is certainly more mixed for many of the developed regions’ equity markets and this is likely to remain the case until the inflation/interest rate picture becomes clearer.
Equity Market Performances (percentage change in euro terms)
|Market||Performance March 2023*||Performance 1 year*||YTD*|
*Source: Financial Times, Financial Express
Following an extraordinary year in 2022 when bond and equity markets fell in tandem, normal service has been resumed to a large extent this year, with volatility in equities being compensated by stability in bond markets. However, while bond markets have recovered a little from their 2022 lows, there is still very good value to be had for investors generally from the wider bond markets. In addition, many bond funds are offering income comfortably ahead of deposits.
Global property has very much fallen out of favour with investors over the past year for a number of reasons
(i) the demand level from occupiers for both office and retail properties is at a low
(ii) rising interest rates have created significant issues for geared funds with many breaching their LTV covenants and
(iii) the illiquid nature of property has been thrown into sharp relief as investors have been prevented from withdrawing their funds pending the disposal of assets necessary to provide liquidity.
However, property is a very mixed asset class and it is evident that all property has been tarred with the same brush. As a result there is undeniable value in a number of specialist property trusts in areas such as logistics, healthcare, retail warehouses etc. where occupier demand levels remain strong.
Having increased our focus on alternative asset classes a couple of years ago, we are sticking to our view that asset groups such as infrastructure, renewable energy and selected hedge fund strategies deserve a long term position in most portfolios. Our Fund in Focus this month is the BH Macro Investment Trust, a listed hedge fund which was the top performing fund on our Buy List in 2022.
As always, you should only consider the investment views contained in this Market Insights update in the context of your own attitude to risk and how such choices might impact your Asset Allocation model. Should you wish to discuss your investment portfolio, please contact Harvest Financial Services on 01 2375500 or email firstname.lastname@example.org.
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