The start of the year brought positivity to markets, with emerging evidence that inflation had peaked in many major economies, bringing greater expectations that central banks would begin to slow down their interest rate hiking programmes. The end of the quarter saw focus turn to the banking sector. Fragility spread first from the US, with the collapse of Silicon Valley Bank, and then to Europe as Credit Suisse was bought out by its Swiss rival, UBS. The takeover restored some calm to the financial sector and meant central banks continued to raise interest rates in March, albeit only by 0.25% in the case of the Federal Reserve and the Bank of England.

Despite the stresses seen in the banking sector, global equities generated a positive performance over the period. UK equities had a poor March, owing to the large exposure to banks, and therefore underperformed the global market.

Bonds rose over the month and quarter, as expectations that we were reaching the peak in interest rates pushed down bond yields (bond prices rise as yields fall). High Yield Bonds benefitted from credit spreads falling i.e. the difference between yields on High Yield and government bonds fell.

Over Q1, the riskier assets, such as equities, performed well in January as investor confidence grew. The bonds in the portfolio performed better in March when investors favoured the safety of government debt during the period of banking stress.

Outlook and topical market themes

The economic outlook for the UK is improving, although it remains challenging. The OBR no longer expects a recession during 2023 and expects headline inflation to drop to 2.9% by the end of 2023.

Although investor confidence has somewhat returned to the banking sector, the impact of any tightening of bank lending on the economy is still to be determined. One positive to emerge is that it could mean central banks won’t have to lift interest rates as high to get inflation under control. Bond Markets are starting to reflect this and an expectation of rate cuts in the US before the end of 2023.