Monthly Investment Review March 2023

Monthly Investment Review March 2023

Market Wrap March 2023 with Jamie Nichol

From the evolving US banking crisis to signs of slowing economic activity and interest rate expectations falling, the fast-paced events of the past month require a more complex discussion of the dynamics driving markets.

In assessing the implications of a still fluid environment for financial institutions, we reflect on parallels drawn against the Global Financial Crisis (GFC) of 2008 and the emerging areas of risk. The portfolio has taken advantage of several opportunities from consequent volatility which we further discuss.

Bank crisis in the US

The failure of Silicon Valley Bank (SVB), reverberations around regional US banks and the ultimate collapse of Credit Suisse punctuated the most impactful month for financial institutions since the GFC. Simply put, things begin to break when interest rates are lifted sharply.

In this instance, banks had invested in portfolios of bonds, which were deeply underwater as interest rates rose. SVB compounded this issue with deposits tied to the tech businesses, which were drawing down cash balances to fund operating losses. The subsequent balance sheet crunch catalysed a broader bank run on smaller and less capitalised lenders. Capital fled to the safety of larger institutions, requiring the government to step in and guarantee all bank deposits to stabilise the banking system. We consider some of the consequences of this collapse.

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Interest rates

Interest rates reacted to the news through the month. The market started to price in expectations that interest rates will peak and subsequently fall over the next few years. Longer term interest rate markets are consistent with inflation easing. The yield curve in the US, Germany and the UK suggests interest rates are close to peaking and will subsequently fall consistent with a recession.

In Australia, we may well withstand another recession thanks to a resilient China and higher population growth.

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Inflation remains a crucial piece of the investment puzzle. Capacity within the economy remains tight albeit we expect pressure to ease as the economy slows. The Citi inflation surprise index is consistent with inflation easing.

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