The first quarter of the year has been volatile but positive for the global equity markets, with the technology sector managing to offset weaknesses in the banking sector. The collapse in early March of Silicon Valley Bank and Signature Bank was followed by the demise of Credit Suisse after “material weaknesses” were revealed in its financial situation. Fortunately, however, a 2008-style banking crisis seems to have been averted.
JPMorgan CEO Jamie Dimon did, however, caution that “the current crisis is not yet over, and even when it is behind us, there will be repercussions […] for years to come”. But he confirmed that recent events have little in common with those that led up to the 2008 Global Financial Crisis.
Fearful of contagion, the financial markets were agitated until the US Treasury Department stepped in to guarantee deposits. Several large institutions – such as HSBC and UBS – then announced that acquisition plans were in place. This shows just how nervous the banking sector still is –15 years after the GFC.
Surprisingly, last year's most unloved sector – technology – now seems to be enjoying a fruitful spring. The NASDAQ 100 Index (home to Apple, Microsoft and a number of other tech behemoths) is in a new bull market, buoyed by hopes that US interest rates are close to peaking. That particular index is up by just over 23% since its low on 28 December 2022.
As far as the technology sector is concerned, the question now is “do you buy it or fad it?”. The answer will depend very much on your time horizon and appetite for risk. The reality is that the first quarter of 2023 has been the reverse of last year, when technology and innovation stocks were absolutely pummelled as fears of inflation and higher interest rates wreaked havoc.
Investors are now watching out for both inflation and interest rates to peak. Furthermore, technology stocks are now cheaper in terms of their price-to-earnings ratios than they were this time last year following a year of multiple contractions in share prices. So if you are a short-term investor, you may see the recent tech rally as an opportunity to lighten up on your positions. But if you have technology exposure in your retirement portfolio – with a long-term time horizon objective – then you should embrace the recent rally (possibly heralding the start of a new bull market) as a core holding for long-term capital growth.
Last weekend, Saudi Arabia and a handful of other countries announced that they would significantly cut their oil production – by as much as a million barrels per day, starting in May. This was a huge surprise and the result was the price of crude oil surging by US$5 to around US$85. Some analysts are now even predicting a per-barrel price of US$100 in the not-too-distant future.
Reduced oil production means reduced supply, which will push up the price on the open market.
Crude oil prices had recently dropped, driven by a slowdown in the global economy and turmoil in the banking sector. This impacts countries such as Saudi Arabia, which are heavily reliant on oil revenues. Cutting production is therefore a reliable way to push prices back up to levels that are acceptable for OPEC and its oil partners.
Unfortunately, crude oil prices are a major driver of gasoline prices. We can therefore expect the price of petrol at the pump to creep back up again. That will impact the haulage market… and will eventually push up food prices. This is what happened last year. But it is difficult to predict exactly how much prices will rise since there are several other factors in play – including refinery outages, changes in demand and the general economic backdrop.
To complicate matters further, Saudi Arabia's relationship with Washington has been somewhat strained in recent months. President Biden's request for an increase in oil production was rebuffed by the Saudis, and the news of production cuts has enraged the Biden Administration.
Meanwhile, Saudi Arabia is getting much closer to China – both economically (through oil deals) and diplomatically. China is already its most important trading partner and it would appear that Beijing now sees the East (rather than the West) playing a more vital role in its economic future.
Since the US is the world’s largest oil consumer, any rise in gasoline prices is guaranteed to hit America's purchasing power. Paradoxically, however, the US is also the largest producer of oil. So any US oil companies that sell crude immediately benefit from any increase in prices. It's also an opportunity for US oil producers to boost their output in a bid to take market share away from the Saudis.
The world's central banks are another interested party: oil prices are a significant factor in determining inflation, and any significant increase will create a further upwards lift and an uncomfortable backdrop for the monetary policymakers. There are, needless to say, other factors involved. Wage growth, shaky confidence and a strong correlation between crude oil prices and producer prices will increase nerves in the months ahead. Global sectors – such as energy and commodities – are likely to be beneficiaries of this recent development.
Recently, the US has made some progress in taming inflation. The UK and Europe have not been quite so successful, but it appears to be moving in the right direction. Nevertheless, we are unlikely to see any interest rate cuts before 2024. Governor of the Bank of England Andrew Bailey has suggested that recent problems in the banking sector would not alter the focus on bringing inflation down. He went on to assert that while there were indeed major strains weighing on the global banking system, UK lenders were resilient and in a position to support the economy. It now looks as though the UK avoided a recession last year (partly helped by the government subsidising energy bills).
Despite volatility and a fairly localised banking crisis, the first quarter of 2023 was positive, with the MSCI All-World Index registering a rise in sterling of just under 4%. And as mentioned above, the NASDAQ 100 Index rallied by just over 20%.
In the UK, our blue-chip Index – the FTSE 100 – recorded gains of just over 2%. The FTSE SmallCap index, meanwhile, disappointed investors, falling by just under 2%.
The bond markets took something of a breather last week. But investors have had a rollercoaster ride in recent times: they have had to contend with the wildest swings in decades as they have navigated the Federal Reserve Bank’s response to the mounting financial instability that threatens to derail its fight against inflation.
Some commodities have benefited significantly from the war in Europe, a reduction in oil supplies and the opening up of the Chinese economy after the Covid lockdowns. In fact, gold registered its second straight quarterly rise. On Monday, it hit US$2000 per troy ounce: investors started to view it as a safe haven asset again as the banking sector turmoil gathered momentum. Gold bullion has a diversifying role to play in client portfolios in times of market disorder.
As far as our investment strategies are concerned, charting a clear course through these choppy waters has been challenging. But our current asset allocation positioning has been fairly robust: it has a higher weighting towards global income, value and commodity exposure. Needless to say, the recent recovery in the technology sector has been an additional tailwind for innovation.
