Quarter 1, 2023 Market Commentary

• Published on April 10th, 2023

Quarter 1, 2023 Market Commentary

Past performance is not indicative of future results. The information mentioned is for illustrative purposes and should not be considered a recommendation to buy or sell.

In Q1, global equities posted gains as recession fears in developed markets receded. This positive performance occurred despite the collapse of Silicon Valley Bank (SVB), which caused significant volatility in banking shares. Growth stocks outperformed value stocks. In fixed income, government bond yields fell, leading to higher prices.

US

US equities rose in Q1, buoyed by investor optimism despite the brief market turbulence following SVB's collapse in March. The Federal Reserve (Fed) raised rates twice during the quarter, and cooling inflation data led to expectations that the rate-hiking cycle might soon end.

The SVB collapse and subsequent financial sector disruption in Europe caused a sharp dip in stocks in March, but markets recovered to end the quarter higher. The Fed expressed confidence in the resilience of the US banking system, raising the policy rate by 25 basis points in both February and March, bringing borrowing costs to their highest level since 2007. Inflation, as measured by the core personal consumption expenditure (PCE) index, rose less than expected in March, fueling speculation that further rate hikes would be limited.

Despite the turmoil, the financial sector largely shrugged off the SVB collapse, as systemic risk was deemed minimal. Energy and healthcare stocks lagged, while tech stocks posted strong gains.

Eurozone

Eurozone shares saw significant gains in Q1, despite volatility in the banking sector. Information technology, consumer discretionary, and communication services sectors led the gains, while real estate and energy lagged.

March brought turbulence to the financials sector following the failure of SVB and the acquisition of Credit Suisse by UBS. Despite this, the eurozone financial sector posted gains for the quarter. Real estate suffered due to concerns over higher financing costs and lower occupancy rates.

The European Central Bank (ECB) raised interest rates by 50 basis points in both February and March. Eurozone inflation hit a one-year low in March, with consumer prices rising by 6.9%, down from 8.5% in February. Core inflation, excluding food and energy costs, increased to 5.7% from 5.6%. The Markit flash purchasing managers' index (PMI) reached a 10-month high of 54.1 in March, driven by the service sector, though manufacturing remained below 50, indicating contraction.

In France, President Macron's government faced extensive protests and narrowly survived a no-confidence vote over plans to raise the retirement age.

UK

UK equities rose in Q1, with economically sensitive areas outperforming amid hopes that central banks might pivot to cutting interest rates later in 2023. Industrials and consumer discretionary sectors saw strong recoveries, reflecting resilience in the UK economy during the energy crisis.

The Office for National Statistics reported that the UK economy did not contract in Q4 2022, avoiding a technical recession. The Bank of England (BoE) continued raising interest rates, driven by stronger-than-expected inflation and a resilient domestic economy.

Japan

Japanese stocks rose strongly in Q1, with the Topix up 7.2% in yen terms. Investor focus remained on the Bank of Japan (BoJ) following a surprise adjustment to the yield curve control policy in December. BoJ governor Haruhiko Kuroda left policy unchanged in January, with attention shifting to the incoming governor, Kazuo Ueda.

Mixed quarterly earnings results were announced from late January to mid-February, with exporters struggling due to yen appreciation and a slowdown in technology sector production. Domestically-oriented companies performed better, though cost increases, including higher electricity prices, were a challenge.

The SVB collapse and the bailout of Credit Suisse by UBS affected market sentiment in March, dragging down Japanese financial stocks. However, the market rebounded by the end of the month, supported by yen weakness benefiting cyclical stocks.

Asia (ex Japan)

Asia ex Japan equities recorded a positive performance in Q1, with strong gains in Taiwan, Singapore, and South Korea offsetting weaker performances in Hong Kong, India, and Malaysia.

Chinese shares gained robustly early in the quarter after Beijing loosened Covid-19 restrictions and implemented supportive property market measures. Investor sentiment improved with the easing of regulatory pressures on China's technology companies.

South Korea and Taiwan posted strong gains in January, while India saw declines due to foreign investor sell-offs and stalled economic growth. February's fears of a global recession weakened sentiment, but March saw broad gains as fears of market contagion from SVB's collapse eased.

Emerging Markets

Emerging markets (EM) posted positive returns in Q1, though they lagged behind the MSCI World Index. Renewed optimism about EM followed the reopening of China's economy, but February and March saw rising US-China tensions and concerns about US and European banks.

The Czech Republic was the best-performing market, with Mexico also outperforming due to improving economic data. Taiwan and Korea benefited from optimism about global growth, while Peru, Indonesia, and Chile also outperformed.

China outpaced the index despite renewed US-China tensions and property sector issues, supported by economic reopening and easing regulatory pressures. South Africa, Poland, and Thailand lagged due to ongoing challenges like South Africa's electricity crisis and political uncertainties.

Brazil underperformed amid softening economic data and political unrest. India faced negative returns due to fraud allegations at a major conglomerate and below-consensus economic data.

Global Bonds

Q1 began with positive sentiment due to falling energy costs and China's economic reopening. However, core inflation measures began to rise again. The collapse of SVB in mid-March shifted concerns to a potential banking crisis, leading to a rally in government bond markets as rate hikes were reconsidered.

Growth improved as inflationary pressures from energy prices eased. Central banks continued raising rates, but some, like the Fed and BoE, slowed their pace. The ECB remained hawkish, raising rates twice by 50 basis points.

The US 10-year yield fell from 3.92% to 3.47%, with the two-year yield dropping from 4.82% to 4.03%. Germany's 10-year yield decreased from 2.65% to 2.29%, and the UK's 10-year yield fell from 3.71% to 3.49%.

Corporate bond markets outperformed government bonds, with narrowing credit spreads. US and European investment grade bonds posted positive returns, while high yield bonds were negatively affected by the banking sector's performance.

Commodities

The S&P GSCI Index recorded a negative performance in Q1. Energy and livestock were the worst-performing components, while precious and industrial metals achieved gains. Within energy, natural gas, gas oil, and heating oil prices fell sharply. Gold saw robust price gains, and silver also increased modestly. Industrial metals like copper and aluminum rose, while nickel and lead prices fell.

Digital Assets

Bitcoin and Ethereum fell by -11.5% and -13.6% respectively in Q3, although Bitcoin remains up 63% year-to-date, one of the best-performing assets in 2023. Volatility, correlation with equities, and correlation among the top 30 tokens have all significantly decreased compared to last year.

US regulatory news was a key driver of price movements, with SEC actions prominently featured. Regulatory enforcement against Coinbase and Binance and subsequent legal rulings influenced the market. Regulatory filings for spot ETFs by major asset managers introduced significant price action around potential approval dates.

The excitement around a spot Bitcoin ETF stems from the potential SEC approval, signaling market acceptance and liquidity for a US-based spot product.

September marked the one-year anniversary of Ethereum's transition to a 'Proof of Stake' consensus mechanism, reducing computational work and eliminating its carbon footprint. The network has operated as intended, with staking assets becoming popular among crypto investors for enhancing returns.