Hello, and welcome to your April investor update.
I’m Pacome Breton, head of portfolio management, here at Nutmeg.
I’ll be answering questions on recent market performance, the outlook for banks after such
an eventful month, and the performance and positioning of the Nutmeg portfolios.
Indeed, March was a busy month for markets.
Some regions fared better than others, but globally, performance was flat to slightly positive
US equities were the best performers on a regional basis, along with emerging Asia.
In the US, the Nasdaq rose more than 9%, pushed higher by a rebound in tech companies.
Among emerging markets, which grew around 3-4% in the period, Southeast Asia, China,
Taiwan, and South Korea had a strong month and, like in the US, were pushed higher by
the size and strength of tech-related stocks in their respective indices.
But the month was mixed, with some markets experiencing negative performance.
This was the case for European and British stocks, which had performed strongly in the
first two months of this year.
European indices, for example, were relatively flat, while the UK’s FTSE 100 fell 4.6%,
its worst month since last September.
If we look at fixed income, it was a more favourable month for corporate and government bonds.
Macroeconomic events pushed bond yields lower and bond prices higher in the US and in the UK.
There are months when you look back and it seems very little happened, and there are
months when it seems so much has happened that it could have filled an entire year.
March was definitely in the latter camp.
The fallout from the failure of Silicon Valley Bank – which was up until recently the 16th
largest bank in the US – was a meaningful event with regards to the speed of its collapse
and the fact that it was the first bank of significant size to fail since the global
financial crisis of 2008.
In Europe, the problems faced by Credit Suisse, and its subsequent bailout by UBS, sparked
fears of broader fragility in the banking sector.
What stunned investors was the speed at which Credit Suisse needed to be rescued, but the
market impact was ultimately limited.
March was also a period of intense central bank activity.
The European Central bank lifted interest rates by a further 0.5%.
The Federal Reserve and the Bank of England also hiked rates by 0.25%, pushing their main
target rates to 5% and 4.25% respectively.
With all this news, data around inflation actually got less publicity than usual but
shouldn’t be ignored.
While the recent trend has been for inflation to be lower and even to surprise on the downside,
this wasn’t totally the case in March.
General consumer price indices (CPI) data in the US was lower, registering at 6.0% year-on-year
versus 6.4% the previous month.
However, core inflation, removing food and energy, moved from 5.6% to 5.5% – so a very
modest decrease and less than what was anticipated by analysts, giving limited room for the Fed
to become more accommodative in the near future.
In the UK, the numbers were more shocking, with inflation accelerating from 10.3% to
10.6%.
The more problematic core inflation rose from 6.0% last month to 6.3% in March on a year-on-year basis.
We do not believe that there are significant risks of another banking crisis at this time.
While the difficulties of Silicon Valley Bank and Credit Suisse may seem quite similar due
to their timing, they fell into distress for very different reasons.
Credit Suisse had been in difficulty since the global financial crisis, and in the end,
lost the confidence of its shareholders.
The case of Silicon Valley Bank and other US regional banks is more symptomatic of the
current environment and the actions of central banks over the last 12 months, which have
undertaken rate tightening at a pace not seen since the 1980s.
Most US regional banks are hurting from higher interest rates, lower levels of deposits,
and the general negativity in the sector over the month.
With regional banks in the US responsible for a significant portion of the loan financing
for both corporates and households, the impact on the economy itself in the US is not expected to be positive.
With regards to central banks, policymakers remain somewhat torn.
On the one side, inflation is proving more resilient than anticipated, and the economic
and employment data remain supportive, so they need to continue raising rates.
Conversely, difficulties in some parts of the banking system mean that they might want
to pause to assess the situation further.
Inflation remained core in their thinking in March,
and the impact of all recent hikes could start to be felt in the coming weeks, which may
raise questions about the path forwards for the hiking cycle.
March was a fascinating month in terms of market performance.
The fact that, on a global level, we ended the month roughly flat was quite extraordinary.
Especially in the US, where indices were positive, even after the worries we saw in the regional
banking sector.
This is the paradox of global markets, at least in the short-term.
The bad news for US financials may reduce access to credit for corporates and households
and therefore impact future growth.
However, markets were still positive.
Future expectations for interest rates dropped quite significantly, which pushed rate-sensitive
stocks higher, in particular those linked to growth sectors such as technology.
So, ultimately, what drove market resilience was the hope that central banks will soon
finish raising interest rates.
A year of rate rises has weighed on market sentiment, so signs that these may be coming
to an end helped markets regain some buoyancy at the end of the month.
On the flip side, the price of oil, which is sensitive to future demand and growth expectations,
was down quite significantly, reflecting anticipation of lower future growth.
The Nutmeg portfolios have been relatively flat overall with some intra-month volatility.
Lower-risk portfolios performed slightly better, pushed higher by the performance of fixed
income, while higher-risk portfolios were on average flat to slightly negative, impacted
by equities and currency movements.
We modestly increased our allocation to the US dollar during the month across all our
portfolios, reflecting the potential for the currency to remain attractive in a lower growth
environment with higher interest rates.
In general, volatility remains elevated in both fixed income and equities.
It is hard to predict when central banks will pause their hiking cycle as inflation moderates
and growth slows, and the effects of higher rates start to be felt across the economy.
On our side, we remain cautiously positioned and slightly underweight in terms of both
bonds and equities.
Current valuations, where we are in the growth cycle, and future central bank action means
we still remain cautious.
With all that in mind, we are still ready to update our views and our portfolios more significantly
when opportunities will arise.
That’s it for this month.
We will continue to keep you updated via regular blogs, the monthly investor update, as well
as the mid-month view from the investment desk videos.
If you have any questions or suggestions for a topic you’d like us to discuss in next
month’s investor update, you can contact us via social media, email or in the comments
section below this video.
Thanks for watching.