Global Market Review – April 2023

Sterling strengthened 1.7% vs the dollar as the pound to dollar rate approached 11-month highs. Asia Pacific and broader Emerging Market equities were laggards, the latter driven by detractions in Chinese big tech and consumer cyclical names. The year-to-date outperformance of European equities vs emerging market equities has been significant (11.1% vs -1.6%) and has only happened in about 5% of cases in recent decades. UK gilts detracted as yields rose in response to data indicating stubborn inflation, while UK commercial property showed further signs of improvement after a dire 2022.

Data from Refinitiv, 1 May 2023

During the month, economic data presented mixed results, with global growth showing resilience despite higher rates. Headline inflation rates have broadly moved lower but core inflation remaining sticky has been a concern for central banks. Elevated core inflation measures have prevented central banks from moving away from a hawkish rhetoric, despite an expectation of the recent banking crisis contributing to tighter financial conditions.

Following the banking sector issues in March, many banks have bolstered liquidity, but moderate credit tightening appears likely, particularly for smaller institutions. Though concerns on contagion and broader issues with vulnerable banks eased throughout April, they re-emerged towards the end of the month with First Republic Bank being the latest casualty. The bank was subsequently acquired by JP Morgan in a deal brokered by US regulators.

While pockets of data remain strong, risks to global economies still exist. The likelihood of lagged effects of rate hikes and banking strains amplifying the tightening of credit conditions remain high. Moreover, many equity markets, particularly the US, remain historically expensive and do not seem to be pricing in recession risk. Additionally, credit spreads remain relatively tight within fixed income. With lower risk options, including short-dated gilts, now offering a reasonable return again, we believe a balanced approach which includes defensive allocations is prudent in this environment. Select alternative assets can also play a role for inflation protection and for providing uncorrelated returns.

UK

Domestic resilience and a value tilt supported the UK stock market in April. Financial services rebounded and was the best performing sector for the month (0.8%), although performance was relatively broad-based, with all sectors other than basic materials (-0.4%) delivering positive returns.

Economic data was mixed, with the manufacturing PMI slipping further into contractionary territory, while services beat expectations. UK headline inflation fell from 10.4% to 10.1% year-on-year in March. A slight deflationary impulse from fuel supported this, however the UK will not see the first step down in broader energy inflation until the April inflation print that is released in May. Against consensus, core inflation remained flat at 6.2% year-on-year. This, combined with strong wage growth, pushed yields higher with gilts finishing the month as the worst performing major developed market sovereign (-1.7%). Given a tight labour market and inflation well above target, the Bank of England remains in a hawkish stance.

Europe

Strong performance in European equities also had good breadth in April, with healthcare the leading sector (0.8%) and technology the single detracting sector (-0.5%). Semiconductor company ASML was a notable detractor as investor concerns grew on industry weakness and chip demand. On the positives, healthcare companies Novartis (+9.9) and Roche (+8.5%) led the strong performance. Luxury goods maker LVMH became the first European company to surpass $500 billion in market value.

Services PMI was positive and moved above 50, however manufacturing PMI fell to a 34-month low in the month and is still well below 50. Services strength was enough to keep eurozone GDP growth positive in Q1, with the economy growing a subdued 0.1% quarter on quarter. The consumer price index fell from 8.5% year-on-year in February to 6.9% in March, with base effects in energy a notable factor. Core inflation remained firm, increasing by 0.1% to 5.7% year-on-year. The combination of these factors, along with positive economic growth surprises and ongoing wage pressures, has led markets to believe that the European Central Bank needs to take further action. This more hawkish outlook pushed European government bond yields higher, and European government bonds delivered returns of -0.1% over the month.

US

The growth heavy US equity market underperformed its peers in April. Performance across sectors was varied, with technology (-0.3%) and consumer cyclicals (-0.3%) detractors and healthcare (+0.2%) and financial services (+0.2%) delivering small contributions to the index. Meta (+11.5%) and Microsoft (+4.8%) were among the leading performers, both reporting earnings beats. Tesla was the main detractor (-22.1%) following a margins miss and another round of price cuts. Q1 earnings season has generally been better than expected so far, albeit the bar was set rather low. Bank results were a mixed bag, however the five largest financial institutions – JPMorgan Chase, Bank of America, Citigroup, Goldman Sachs, and Morgan Stanley – collectively exceeded Q1 earnings expectations by 15.3%. Bank results outside of this were more muted.

Economic data showed momentum accelerating over the month. April flash PMIs showed an increase in economic activity across manufacturing and services sectors which both beat expectations. Inflation printed below expectations at 5.0% year-on-year, partly due to base effects for energy. Core inflation increased from 5.5% in March to 5.6% year-on-year in April. There were also signs of cooling in the labour market. The unemployment rate fell to 3.5% and non-farm payrolls grew by 236,000, however wage growth softened to 4.2% year-on-year. The market still expects US interest rates to rise by 25bps in May but then believe the Federal Reserve will pause before cutting rates at the back end of 2023.

Japan

The Japanese stock market declined 1.2% in sterling terms in April. The Yen was weak throughout the month and declined 4.3% vs sterling and 2.7% vs the US dollar. Negative performance was relatively broad across sectors with technology (-0.6%) and basic materials (-0.4%) the leading detractors.

As anticipated, Japan's central bank has left its policy rate unchanged at -0.10%. However, the Bank of Japan (BOJ) stated that inflation is expected to fall below the 2% target by 2025. This has increased the likelihood that the BOJ will not follow the interest rate hike cycles of central banks elsewhere in the world. Furthermore, the BOJ has decided to maintain the policy of yield curve control, contrary to expectations of easing or abolition following the appointment of new chairman Kazuo Ueda. Yield curve control ensures that the 10-year bond yield remains within a range around the 0% target.

Asia ex Japan and Emerging Markets

Negative performance across Asia and emerging markets was largely fuelled by technology and reports of incoming US investment regulations meant that communication services and consumer discretionary stocks were also particularly badly hit. JD.com (-21.1%), Alibaba (-19.6%), Tencent (-12.2%) and Baidu (-23.5%) were all notable detractors, while insurance companies were a positive outlier.

China’s economic recovery continued with GDP growing by a higher-than-expected 4.5% year-on-year during the first quarter of 2023. Retail sales were also significantly above expectations at 10.6% year-on-year. However, PMIs signalled softer activity – particularly from the manufacturing sector. Despite the rebound, headline and core inflation rates remained low, both at 0.7% year-on-year in March.

Fixed Interest

Global government bond yields had no clear direction over the month. 2-year and 10-year gilt yields increased by 40bps and 29bps respectively. Volatility across yields was influenced by stubborn inflation data providing a headwind and weak economic data providing support. European investment grade corporate bond spreads continued a recovery in April as banking crisis fears cooled. US treasury yields remained relatively flat ending the month at 4.0% for the 2-year and 3.5% for the 10-year.

Property and Alternatives

Real Estate Investment Trusts (REITs) staged a stronger recovery in April with industrial REITs leading the way. Urban Logistics (20.3%), Warehouse REIT (20.1%) and Tritax Big Box (18.8%) were leading performers. Direct infrastructure investment trusts saw low single digit positive returns with Octopus Renewables a notable positive outlier (+14%). Octopus Renewables, primarily a wind and solar focused strategy, diversified into a green hydrogen joint venture in early April which the market reacted positively to.

Industrial metal prices fell in April as macroeconomic data fuelled demand concerns. Copper prices fell 4.4% (USD terms). Inventories remain low but are not being replenished due to recession fears. In early April, OPEC announced a surprise cut in oil output, leading to a sharp price increase. However, by the end of the month, this gain was completely reversed due to expectations of lower demand resulting from the global growth slowdown. Moreover, it is becoming increasingly apparent that large amounts of Russian oil are entering the market, despite sanctions in place. During the first half of the month, gold prices continued to climb and reached levels of around 2040 dollars per ounce. Gold prices retreated somewhat in the second half of the month and fell back to below 2000 dollars per ounce.

The value of investments can fall as well as rise and you might get back less than you invest. Past performance is not a reliable indicator of future performance.