​Investment Update — April 2023

The fastest and broadest tightening of monetary policy in over 40 years was always going to cause some challenges, and recent weeks have reminded us that financial stability, not a global recession, is perhaps the biggest risk in the short term. Whilst US and European central banks and regulators will argue that the collapse of SVB and the takeover of Credit Suisse by UBS were idiosyncratic issues, the wider point is that higher interest rates are having an impact on the global financial system. With banks likely to act more cautiously going forward, lending standards may tighten and potentially, in the worst case scenario, lead to a credit crunch.

Equity markets have largely shrugged off recent events, although we have seen large performance dispersion between sectors. US banks have fallen nearly 20% since the start of the crisis, whereas the S&P 500 is down just 2%. However, there has been no such complacency in bond markets where the 2yr US Treasury yield has fallen from 5.1% to 4.1% currently, suggesting that central banks won’t be raising rates for much longer. Central banks have already started to push back against this view, stating that they believe they have the necessary tools to fight inflation and maintain financial stability.

Spain’s inflation data for March provided a timely reminder that headline inflation is set to fall quickly in the coming months, as base effects remove some of the impact of last year’s jump in energy prices. Spain’s consumer price inflation fell to 3.3%, down from 6% in February, and whilst Spanish inflation data in isolation isn’t significant, it provides a useful read across for other European countries.

European gas prices are now at around 20-month lows and it’s a similar story in the US where natural gas prices have fallen more than 50% over the quarter, the sharpest quarterly contraction in prices since the data series began in 1990. Falling energy prices should continue to feed through into lower consumer prices and food prices should soon respond to a significant decrease in agricultural commodity prices.

Written by:
Charlie Lloyd
Head of Investment, Skerritts

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