Overall Market Summary:
Global equities gained in Q1, buoyed by easing recession concerns in developed markets. This rise came despite significant volatility following the collapse of Silicon Valley Bank (SVB). Growth stocks outperformed value stocks. In fixed income markets, government bond yields fell (indicating rising prices).
United States:
Despite the short-lived market turbulence caused by the collapse of Silicon Valley Bank (SVB) in March, investor optimism led US stocks higher for the quarter. The Federal Reserve (Fed) raised rates twice, and cooling inflation data led to expectations that the rate hike cycle might soon end.
The SVB collapse and subsequent financial disruptions in Europe caused a sharp dip in stocks in March, but markets recovered to finish the quarter higher. The Fed expressed confidence in the resilience of the US banking system, raising the policy rate by 25 basis points in both February and March, bringing borrowing costs to their highest since 2007. Inflation, measured by the core personal consumption expenditure (PCE) index, climbed less than expected in March, leading to speculation that further rate hikes may be limited.
The financial sector largely shrugged off the SVB events, with minimal systemic risk perceived by investors. Energy and healthcare stocks lagged, while tech stocks made significant gains.
Europe:
Eurozone shares saw strong gains in Q1 despite volatility in the banking sector. Gains were led by information technology, consumer discretionary, and communication services sectors, while real estate and energy lagged.
Financials experienced turbulence in March following the failure of SVB and the acquisition of Credit Suisse by UBS, brokered by Swiss authorities. However, the eurozone financial sector posted overall gains for the quarter, with Credit Suisse's problems viewed as contained. The real estate sector faced significant declines due to concerns over higher financing costs and weaker occupancy rates.
The European Central Bank (ECB) raised interest rates by 50 basis points in both February and March. Eurozone inflation declined to a one-year low in March, with consumer prices rising by 6.9%, down from 8.5% in February. However, core inflation (excluding food and energy) increased to 5.7% from 5.6%. The Markit flash purchasing managers' index reached a 10-month high of 54.1 in March, driven by the service sector, while the manufacturing index remained below 50.
In France, government plans to raise the retirement age sparked extensive protests, with President Macron's government narrowly surviving a no-confidence vote.
United Kingdom:
UK equities rose over the quarter, with economically sensitive areas outperforming amid hopes that central banks might pivot to cutting interest rates later in 2023. Industrials and the consumer discretionary sector performed well, reflecting a strong recovery in many domestically focused areas, as the UK economy showed resilience during the energy crisis.
The Office for National Statistics revealed that the UK economy did not contract in Q4 2022, avoiding a technical recession. The Bank of England (BoE) still expects a recession later in 2023, but it is projected to be shallower than previously forecast due to falling wholesale energy prices. The BoE's Monetary Policy Committee continued to raise interest rates as inflation remained a concern.
Japan:
Japanese stocks rose strongly in Q1, with the Topix up 7.2% in yen terms. Investors focused on the Bank of Japan (BoJ) after the surprise adjustment to the yield curve control policy announced in December. Contrary to speculation, BoJ Governor Haruhiko Kuroda left policy unchanged in January. Attention then shifted to the policy stance of new governor Kazuo Ueda, who will replace Kuroda in April.
Quarterly earnings results from late January to mid-February were mixed. Exporters struggled due to yen appreciation in Q4 2022 and a production slowdown affecting technology sectors. Domestically-oriented companies reported better-than-expected sales but faced cost increases, including higher electricity prices.
Market sentiment was initially dampened by the collapse of SVB and the Credit Suisse bailout but rebounded towards the end of March. Yen weakness supported cyclical stocks. The Tokyo Stock Exchange's anticipated guidance urging companies with a price-to-book ratio below 1 to boost corporate value attracted global attention.
Asia (excluding Japan):
Asia ex Japan equities recorded positive performance in Q1, with strong gains in Taiwan, Singapore, and South Korea offsetting weaker performances in Hong Kong, India, and Malaysia.
Chinese shares rose robustly at the start of the quarter following Beijing's easing of Covid-19 restrictions. Supportive measures for the property market and the regulatory easing on technology companies also boosted investor sentiment.
South Korea and Taiwan achieved strong gains in January, while India saw declines amid foreign investor sell-offs and caution over stalling economic growth. In February, fears of a global recession weakened sentiment, causing sharp falls in Thailand, Malaysia, and South Korea. However, equities rebounded broadly in March as fears of contagion from SVB's collapse eased.
Emerging Markets:
Emerging markets (EM) posted positive returns in Q1, though they lagged behind the MSCI World Index. Optimism about EM was fueled by China's reopening, but US-China tensions and banking sector volatility in Europe dampened sentiment in February and March. Central banks continued to raise interest rates, with US rates reaching their highest level since 2007 in March.
The Czech Republic was the best-performing market, with Mexico, Taiwan, and Korea also performing well due to improving economic data and optimism about global growth. Peru, Indonesia, and Chile outperformed as well.
China outperformed despite US-China tensions following the shooting down of a Chinese high-altitude balloon in US airspace. Optimism about the economy's reopening and easing regulatory pressures on the internet sector were positive for the market.
South Africa, Poland, and Thailand lagged, with South Africa suffering from an electricity crisis and being 'grey-listed' by the Financial Action Task Force for deficiencies in anti-money laundering processes. Brazil underperformed due to softening economic data and anti-government riots, while India faced negative returns amid fraud allegations at a major conglomerate.
Global Bonds:
The first quarter began with positive sentiment on growth as energy costs fell and China's economy reopened. However, the collapse of Silicon Valley Bank in mid-March overshadowed concerns about re-accelerating inflation, prompting a sharp rally in government bond markets.
Fears of a banking crisis shifted market expectations from rate hikes to rate cuts in some markets. Growth improved as headwinds from higher inflation on consumers' real incomes, due to energy prices, began to abate. While signs of hiking cycles impacting the broader economy emerged, core CPI delivered upside surprises in the US and Europe.
Central banks continued raising interest rates, though some adjusted their stances. The Fed announced two 25bps hikes, the BoE approved two hikes (50bps and 25bps), and the ECB remained more hawkish with two 50bps hikes. The Bank of Canada enacted a 25bps hike but signaled a pause, while the BoJ made no further adjustments to yield curve control despite rising core inflation.
Markets were volatile with widening credit spreads. US and European investment-grade bonds posted positive returns towards quarter end, but high yield bonds were negative, dominated by poor performance in the banking sector.
US 10-year yields fell from 3.92% to 3.47%, and two-year yields fell from 4.82% to 4.03%. Germany's 10-year yield decreased from 2.65% to 2.29%, and the UK 10-year yield fell from 3.71% to 3.49%, with two-year yields dropping from 4.07% to 3.44%.
The US dollar weakened against most G-10 currencies, driven by changing rate hike expectations. Convertible bonds benefitted partially from equity market gains, with the Refinitiv Global Focus convertible bond index advancing 2.9% in US dollar terms. New issuance volume for convertibles reached US$22.5 billion in Q1, a sharp contrast to last year's record lows.