Investment Update — March 2023
Buoyant US economic data and the pace of China’s reopening allayed fears that a global recession is inevitable this year, although markets responded by pricing in further rate hikes from major central banks. The fall in inflation appears to have lost some momentum too, prompting bond and equity markets to give up some of January’s gains. Global equities and global bonds returned -3% and -1.4% respectively. Asia Pacific ex-Japan was the worst performing equity region, falling by over 6%, whereas UK and European equities were almost flat on the month. Commodities were weak as gold fell 5%, oil prices fell 2%, and industrial metals lost 8%.
The recent outperformance of European equities reflects the sharp fall in natural gas prices, which have fallen to around a third of the price seen in early December. The US is also enjoying a mild winter and US gas prices have fallen to about a quarter of last year’s high. Weaker energy prices should begin to show up in headline inflation numbers in the coming months, and the UK government is under pressure to abolish April’s increase in the energy price guarantee.
This is a very unusual business cycle, one which has been distorted by Covid, the war in Ukraine and the response from governments and central banks. Both of these events caused huge supply and demand disruptions, which will continue to be felt for some time. This is particularly true for labour markets where participation rates have not fully recovered to pre-pandemic levels. A decade characterised by weak growth and low inflation has been cast aside, potentially replaced by a period of stronger growth and higher inflation.
Whilst recent economic data has pointed to an acceleration in activity since December, we are mindful that US data has been volatile and revision-prone of late. A number of factors could be at play here, including unseasonably warm weather, but the lesson here is to avoid placing too much weight on any single data point. By spring, the path of inflation and interest rates should be apparent, but in the meantime, we think it’s prudent to adopt a relatively cautious approach when it comes to equity markets.
Head of Investment, Skerritt
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