2023 Q1 – Events so far
As expected, the first quarter of 2023 has seen further interest rate increases globally and inflation is still higher than targeted in developed economies. Outlooks are generally expecting volatility in equity markets but fixed income holdings are continuing to provide higher income yields than seen in over a decade.
Commentary still remains mixed as to which economies will experience a recession in 2023 and how severe the regional recessions could be. Some of the prior optimism we saw in January has been reined back following the collapse of two US Banks and the forced takeover of Credit Suisse but there is still belief that some growth is possible and opportunities are still presenting themselves as valuations start to look more appealing.
How have asset classes performed so far this year?
Although the income yields of Fixed Interest investments are still higher than we’ve seen for a number of years, the capital value of the investments are still sensitive to persistent high inflation as shown in the graph below which shows the performance of relevant indices for Corporate and Government Bond holdings.
Also shown is how the UK Direct Property sector has performed since the start of the year. Although growth has been very slow, as an asset class it has helped with volatility within diversified portfolios.
As expected, the first quarter of 2023 has seen further interest rate increases globally and inflation is still higher than targeted in developed economies. Outlooks are generally expecting volatility in equity markets but fixed income holdings are continuing to provide higher income yields than seen in over a decade.
Commentary still remains mixed as to which economies will experience a recession in 2023 and how severe the regional recessions could be. Some of the prior optimism we saw in January has been reined back following the collapse of two US Banks and the forced takeover of Credit Suisse but there is still belief that some growth is possible and opportunities are still presenting themselves as valuations start to look more appealing.
How have asset classes performed so far this year?
Although the income yields of Fixed Interest investments are still higher than we’ve seen for a number of years, the capital value of the investments are still sensitive to persistent high inflation as shown in the graph below which shows the performance of relevant indices for Corporate and Government Bond holdings.
Also shown is how the UK Direct Property sector has performed since the start of the year. Although growth has been very slow, as an asset class it has helped with volatility within diversified portfolios.
The chart below shows equity index performance since January with the Euro Stoxx demonstrating a strong start to the year. The developed markets have so far seen more recovery than both the emerging markets and Asia Pacific region.
What’s going on with the banks?
As interest rates continued to rise in the US and Europe, a mini banking crisis materialised when the Silicon Valley Bank (SVB) and Signature Bank failed and there was a forced takeover of Credit Suisse in Europe. This had brought back fears of a credit crunch akin to those experienced in the global financial crisis in 2008.
SVB specialized in lending to technology companies and the bank grew by over 400% in just 3 years. Due to its concentrated deposit client base, and main investment in government securities, as rates rose and the confidence in SVB’s balance sheet diminished, depositors withdrew around £3 billion of deposits in a single day. Once a run on a bank starts it can be difficult to stop and subsequently SVB collapsed.
Closer to home, Credit Suisse also suffered at the hands of central bank interest rate increases and with a loss of market confidence in the what looked to be a healthy looking balance sheet, the Swiss financial regulator had to step in which resulted in a forced take over by UBS. Credit Suisse held high uninsured deposits and had posted sizeable losses in both 2021 and 2022 which put them under more stress in the change of market conditions.
The fallout from the collapse of SVB may have been contained but its effects have been felt across global equity markets. The banking industry’s vulnerabilities are a sign of a tighter monetary environment and this could lead to even tighter financial conditions that may have an earlier and more significant impact on the real economy. Some commentators have suggested that further interest rate increases, while perhaps being viewed as necessary to contain inflation, could exacerbate the economic weakness.
The Bank of England has confirmed that there has been no increased stress in the UK Banking system because of the turmoil (although they are monitoring the banks carefully) and inflation remains their primary concern. UK and Irish Banks are subject to better regulatory frameworks, deposit structures, and accounting practices than many other developed market jurisdictions and importantly, they are restricted in how much interest rate risk they can take with deposits. Many UK banks also have a diversified deposit base with less customer concentration.
Investment Committee discussions in the last quarter
The Investment Committee have recently met and are reviewing market information during the lead up to the new portfolios release in June. At this point, we still remain comfortable with the strategic allocation of equities, fixed interest, property and cash holdings but we have discussed options around changes to our geographical weightings as well as conducting our full annual review of our fund panel. This work will be stepping up further over the next month ready for our June release.
Risk Warnings:
The value of an investment and the income from it could go down as well as up.
All investing is subject to risk, including the possible loss of the money you invest.
Past performance is not a reliable indicator of future results.
Diversification does not ensure a profit or protect against a loss.
Please remember that all investments involve some risk. Be aware that fluctuations in the financial markets and other factors may cause declines in the value of your account. There is no guarantee that any particular asset allocation or mix of funds will meet your investment objectives or provide you with a given level of income.
This communication is for general information only and is not intended to be individual advice. It represents our understanding of law and HM Revenue & Customs practice as at 20th April 2023. You are recommended to seek competent professional advice before taking any action.
As interest rates continued to rise in the US and Europe, a mini banking crisis materialised when the Silicon Valley Bank (SVB) and Signature Bank failed and there was a forced takeover of Credit Suisse in Europe. This had brought back fears of a credit crunch akin to those experienced in the global financial crisis in 2008.
SVB specialized in lending to technology companies and the bank grew by over 400% in just 3 years. Due to its concentrated deposit client base, and main investment in government securities, as rates rose and the confidence in SVB’s balance sheet diminished, depositors withdrew around £3 billion of deposits in a single day. Once a run on a bank starts it can be difficult to stop and subsequently SVB collapsed.
Closer to home, Credit Suisse also suffered at the hands of central bank interest rate increases and with a loss of market confidence in the what looked to be a healthy looking balance sheet, the Swiss financial regulator had to step in which resulted in a forced take over by UBS. Credit Suisse held high uninsured deposits and had posted sizeable losses in both 2021 and 2022 which put them under more stress in the change of market conditions.
The fallout from the collapse of SVB may have been contained but its effects have been felt across global equity markets. The banking industry’s vulnerabilities are a sign of a tighter monetary environment and this could lead to even tighter financial conditions that may have an earlier and more significant impact on the real economy. Some commentators have suggested that further interest rate increases, while perhaps being viewed as necessary to contain inflation, could exacerbate the economic weakness.
The Bank of England has confirmed that there has been no increased stress in the UK Banking system because of the turmoil (although they are monitoring the banks carefully) and inflation remains their primary concern. UK and Irish Banks are subject to better regulatory frameworks, deposit structures, and accounting practices than many other developed market jurisdictions and importantly, they are restricted in how much interest rate risk they can take with deposits. Many UK banks also have a diversified deposit base with less customer concentration.
Investment Committee discussions in the last quarter
The Investment Committee have recently met and are reviewing market information during the lead up to the new portfolios release in June. At this point, we still remain comfortable with the strategic allocation of equities, fixed interest, property and cash holdings but we have discussed options around changes to our geographical weightings as well as conducting our full annual review of our fund panel. This work will be stepping up further over the next month ready for our June release.
Risk Warnings:
The value of an investment and the income from it could go down as well as up.
All investing is subject to risk, including the possible loss of the money you invest.
Past performance is not a reliable indicator of future results.
Diversification does not ensure a profit or protect against a loss.
Please remember that all investments involve some risk. Be aware that fluctuations in the financial markets and other factors may cause declines in the value of your account. There is no guarantee that any particular asset allocation or mix of funds will meet your investment objectives or provide you with a given level of income.
This communication is for general information only and is not intended to be individual advice. It represents our understanding of law and HM Revenue & Customs practice as at 20th April 2023. You are recommended to seek competent professional advice before taking any action.
