MARKET COMMENTARY – MARCH 2023

Equities and bonds got off to a positive start this year however markets faced some challenges recently given the realisation that higher inflation may persist for longer than markets expected. Government bond yields moved higher as a result, meaning bond prices fell during the month.

Whilst monetary policy tightening has started to curb inflation, the US Federal Reserve (Fed), European Central Bank (ECB) and Bank of England all continued to raise interest rates in February and indicated that further tightening is needed to bring inflation down to its target. Resilient economic data and the prospect of a delayed recession should give some support to equities, however, markets were clearly disappointed that the peak in interest rates and the prospect of monetary easing may be further away than previously anticipated.

With housing costs being the major contributor to inflation, along with a robust labour market and retail sales, the US Fed raised interest rates by 25 basis points to 4.75% and warned that the process of disinflation is expected to have a long way to go if economic data remains strong. US equities declined in February with almost all sectors of the S&P 500 Index weaker. Energy was the worst performing sector while technology was resilient for example Nvidia posted strong results and announced greater involvement in artificial intelligence.

UK equities held up well during February and the FTSE 100 index reached a record high. Energy, healthcare and telecoms sectors outperformed, supported by the recent US dollar strength. With the UK economy avoiding a technical recession, the performance of some domestically focused stocks has also been positive. In line with expectations, the Bank of England raised interest rates by 50 basis points at the beginning of February, moving the base rate to 4.0%. Although inflation seems to have reached its peak, it remains stubbornly high. The labour market remains resilient with a low unemployment rate and strong wage growth. The UK economy is however more exposed to rising interest rates than other economies given the shorter-term mortgages compared with the US and most of Europe.

The risks of a deep recession in Europe has decreased significantly. Some energy intensive manufacturing sectors are restarting production after suspension during the energy crises. Lower energy costs have been positive for households and firms, and the significant improvement in consumer and business confidence has driven the outperformance of European equities over the past few months. Eurozone shares recorded gains in February with the top performing sectors being communication services, financials, industrials and consumer staples while property, technology and healthcare declined. The ECB raised interest rates by 50 basis points to 2.5% in February and highlighted its intention to continue interest rate hikes until inflation comes down to its 2% target. Markets are expecting interest rates to reach 3.9% by the end of the year.

Europe’s commitment to accelerating the energy transition has been supported by various initiatives, including the ‘Green Deal Industrial Plan’ which is focused on increasing the manufacturing capacity for green technologies and products, a ban on the sale of combustion engine cars by 2035, and the issuance of green bonds that offer lower financing costs for climate-related investments.

Chinese equities have been volatile. The post pandemic reopening, supported by the services sector and increased consumer spending, should be positive for both China’s economy and its Asian and European trade partners. Escalating geopolitical tensions between the US and China weighed on sentiment in February, resulting in emerging market equities recording negative returns in February, the strength of the US dollar was another headwind.

Lower gas prices and China’s economic reopening have been fundamental improvements seen in markets over the past few months, however, interest rates are now likely to remain higher for longer due to persistant inflation. Markets have seemingly adjusted to reflect the change in expectations, however, volatility may persist due to the ongoing uncertainty about the outlook for inflation, interest rates and geopolitical developments.

 Total returns in GBP to 28/02/2023

  *January 2023

Source of data: FE Analytics, www.bankofengland.co.uk, www.ons.gov.uk

The content contained in this article represents the opinions of MacIntosh & James Partners Ltd. The commentary in no way constitutes a solicitation of investment advice and should not be relied upon in making investment decisions. Past performance is not a reliable indicator of future results. The value of your investments can fall as well as rise and are not guaranteed.