March turned out to be a pretty eventful month for financial markets. Banking headlines caused a rout in equity indices by mid-March, a period synonymous with the Ides of March, a time branded in history with dark and gloomy connotations. China’s president Xi gained an unprecedented third term as president. The UK economy rebounded with much better than expected GDP data for January, and inflation ticking back up in February and US consumers reported a rise in their confidence to spend.

Regions

Banks took centre stage in March as those old enough to remember the fallout of the banking crisis in 2008 took shelter in more defensive assets amidst concerns that these were echoes of the past solvency crisis. And, despite banks needing to be recused, major central banks have continued to raise rates and indicate that rate rises are set to continue!

In the US, a rally towards month end saw February’s closing equity valuations, after initial concerns over bank liquidity, eke out a gain for a month that was mostly spent underwater. The S&P 500 ended the month up 1.46%, while the Nasdaq, which is weighted towards technology and healthcare stocks, rose 7.25% on the back of expectations that the US Federal Reserve (Fed) would slow down the rate of interest rate increases in light of the banking situation. The US continued to report stronger than anticipated growth, supported by positive ISM Services PMI data reported in March for February. However, demand for manufactured goods continued to fall (The Purchasing Managers Index, or PMI, is a monthly survey of the manufacturing industry and is used as an indicator for outlook). There was a strong rise in consumer confidence despite retail sales slipping in February.

In March, Eurozone shares pulled back after outperforming most other regions in January and February. Despite the pull back a late month end rally saw the Euro STOXX rise 0.74%. The pull back earlier in the month was driven by jitters surrounding bank liquidity and the European Central Bank (ECB) raising rates. Despite worries that higher borrowing costs could weigh on the banking sector after the loss of confidence in Credit Suisse, the interest rate was raised from 3.0% to 3.5%⁽¹⁾. The ECB had indicated at its February meeting that it intended to raise rates in March, but market participants had anticipated a last-minute U-turn given the concerns surrounding the banking sector.

UK shares slipped -2.80% after posting the biggest regional gains among those we measured in February. The drop was led by a sell-off in the banking sector, and by commodity prices extending losses over the month, which impacted commodity stocks. These make up a significant proportion of the UK market. Despite signs of growth in the UK economy and recent news that UK mortgage approvals rose more than expected in February, domestically focused mid-caps fell.

In early March, the Japanese stock market experienced good gains. Then, as with other markets the bank stresses took their toll at the mid-point, however the Nikkei 225 managed to keep its head above water, rising 2.39% by month end. Reported annual core inflation fell sharply to 3.1% during the period supporting market returns.⁽²⁾

Chinese shares tracked the Japanese market fairly closely over the month, eking out a gain of 1.19% by month end. The market was initially boosted in early March by stronger than anticipated service and manufacturing PMIs. Like other markets, a late rally saw the MSCI Emerging Markets post a gain of 0.88%, faring better than the UK and European markets.

Assets

Global government bond yields tumbled in mid-March as investors sought out safe haven assets in light of the fall out in the banking sector. A secondary effect on yields was investors thinking that central banks would ease up on rate hikes ahead as fears of contagion across the sector spiked. Despite the Fed, Bank of England (BoE) and the ECB raising rates later in the month, yields on government bonds remained lower than where they were at the start of March. Yield on the 2-year Gilt fell from 3.68% at the start of the month to 3.45% by month end. The yield on US 2-year Treasuries fell from 4.79% to 4.06% by month end.⁽³⁾ It was the safe haven of gold that proved to be the most attractive to investors in March, up 6.36% over the month.

Equities as measured by the MSCI World index, finished March underwater. Rate sensitive technology was a bright spot in the asset class getting a boost on anticipation rate rises would slow ahead, the MSCI ACWI Information Technology and Communication Services index rose 7.20%.

Global real estate, which tends to be one of the better performing asset classes during periods of inflation, continued to disappoint as interest rates on other low risk securities such as government securities rose, providing a more attractive opportunity. The MSCI ACWI/REITS index fell -3.84%

Considerations for long-term investors

Those with a memory of long queues outside bank branches in 2008 were right to be spooked by the situation that manifested in the banking sector in March. However, there are some differences between 2008 and today. The main difference is that 2008 was a solvency crisis, while recent events have been focused on bank liquidity. Solvency refers to a bank's ability to meet its long-term obligations, while liquidity refers to its ability to meet short-term obligations, such as depositor withdrawals. In a liquidity crisis, central banks tend to step in as lenders of last resort, as we have seen this month with the US Federal Reserve and the Swiss National Bank coming to the rescue.

Some mitigation of those headwinds created by a fading confidence in the banking sector may be achieved by having some exposure to absolute return funds, safe haven assets like gold and silver, and government bond funds in portfolios. Diversifying a portfolio with these types of assets can be beneficial. Investing in these diversifying assets can reduce a portfolio’s sensitivity to stock market movements. When equity markets slump, government bonds and gold tend to be particularly helpful in limiting downside losses.

Of course, over time, weightings in individual asset classes will change, driven by returns of the underlying assets. So it's important to keep an eye on that from time to time to make sure that the risk/return profile of your portfolio is still in line with your investment objectives and make any rebalancing decisions to get it back in line.

Sources: FE Analytics (monthly performance figures for funds and market 28/02/2023 to 31/03/2023). Qualitative commentary from TILLIT meetings with fund managers.

(1) Source: ECB interest rate March 2023
(2) Source: Japanese inflation
(3) Source: UK 2 year Gilt yield and US 2 year Treasury yields

Date of publication: 5th April 2023