Points of Interest
- Markets have settled down after the rollercoaster in February and March, with equities continuing their recovery and the FTSE 100 closing the month just below its record high.
- Global economic indicators are less negative, and inflationary pressures are easing. However, interest rate rises could lead to more constrained lending and the view the global economy will slow through 2023.
- The Banking sector is in better financial health than during the 2008-9 crisis, with good asset quality, strong liquidity, and increased capital. While weaker banks may continue to struggle, impacting the economy as lending reduces, this may help ease global inflationary pressures.
- Natural gas prices remaining low in Europe will help allay fears of a potential recession, with consumer confidence rising and China’s economy reopening, boosting hopes of global growth.
- The latest poll by Bank of America Corp. is the most cautious in months, but equities are performing strongly. Every bit of positive news, such as lower energy prices, is seen as a real positive.
- We continue to actively manage portfolios looking to invest in excellent medium and long-term opportunities during periods of market uncertainty.
Markets have settled down after the rollercoaster seen in mid-February and early March after the collapse of three US banks, which prompted concerns about another global financial crisis. Meanwhile, in Europe, problems at Credit Suisse led to its takeover by Swiss rival UBS. Despite this, equities continued their recovery from late March into April, with the UK’s FTSE100 closing the month just below its record high.
Recent global economic indicators are less negative than expected. Inflationary pressures are slowly abating (more so in the US than the UK) as supply chain pressures ease, and the sharp jump in energy prices 12 months ago is starting to drop out of calculations. However, the sharp rise in interest rates has exposed weaknesses in the banking sector, which could lead to more constrained lending going forward. The consensus view is now that the global economy will slow through 2023.
The banking sector seems in considerably better financial health than during the 2008-9 crisis, stemming from the belief that Banks’ asset quality is good, liquidity is strong, and they hold around three times the amount of capital they did then. Worries remain that other weaker banks could continue to struggle over the coming months, which may impact the wider economy as banks reduce their lending. One positive consequence, however, is that this may help ease global inflationary pressures, boosting confidence that interest rates will peak soon and then start easing.
There are several other positive developments helping equity markets to recover. In Europe, for example, natural gas prices have remained low, helping to lessen concerns about a potential recession. This has been reinforced by various sentiment indicators, showing that consumer confidence has risen to its highest level in several months. Meanwhile, in China, the economy’s reopening continued, boosting hopes of global growth.
The latest poll, by Bank of America Corp. of global fund managers, was arguably more insightful than usual. The monthly survey of around 300 managers with roughly $700 billion in assets under management in early April captured sentiment for the first time after the March mini-banking crisis. It highlighted a credit squeeze and global recession as the biggest risks to markets; it also showed that investors still worry about high inflation, despite concerns about a financial disaster, usually viewed as deflationary.
This was the most cautious survey in several months, yet what is interesting is why equities have performed as strongly as they have. The most likely reason is that the banks’ problems will stop central banks from raising interest rates too aggressively. Another reason for the resilience in equity markets is that maybe investors were expecting much worse at the start of the year, so every bit of positive news, such as lower energy prices, is seen as a real positive.
We continue to actively manage portfolios looking to invest in excellent medium and long-term opportunities during periods of market uncertainty.
