Although April was a relatively quiet month from a financial markets perspective, despite market concerns, stocks have generated good returns so far in 2023.
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Rebound Continues
- Stock markets declined sharply mid-month following bank bailouts, but quickly recovered
- The global stock market (MSCI World Index) rose 2.8% in March and is up 7.4% this year
- The bond market (Bloomberg Global Aggregate Index) rose 2.5% and is up 2.9% this year
Key Themes
April was a relatively quiet month from a financial markets perspective. Most assets drifted slightly higher in the absence of any major events or central bank meetings. One-third of 2023 has now passed and it has been a good year so far, following the declines of 2022. However, inflation remains very high with UK CPI reading 10.1% and even the most generous measures of ‘core’ inflation remaining stuck around 5.5% in the UK, EU & US. The Bank of England and US Federal Reserve are expected to raise interest rates by another 0.25% in May and further hikes may still be required.
UK
The FTSE 100 large-cap index remained relatively robust throughout 2022 and has produced good gains this year too. A rise of 3.4% in April took this year’s return to 7.1%. UK stocks outperformed other developed markets in April with the FTSE 250 mid-cap index (+3.2%) and FTSE Small Caps index (+3.7%) also doing well. Interestingly, UK mid-caps now have higher dividend yields than large caps (4.3% versus 3.4%), for the first time in many years. This could be a sign of the value on offer among smaller UK stocks, which were hit hard in 2022 and are yet to really recover.
United States
The US regional bank crisis rumbles on, with First Republic Bank being rescued by JP Morgan in a cut-price deal following deposit outflows. First Republic was the 14th biggest lender in the US, among 4,700 commercial banks. The US has one of the highest ‘banks-to-population’ ratios in the world and such takeovers represent a further step towards the ‘too big to fail’ banking model which is already entrenched in the UK and EU. The US stock market remained relatively calm, with the S&P 500 index rising 1.5% and the Nasdaq finishing flat for the month.
Europe
Economic data showed the Eurozone avoided a technical recession by the smallest of margins, with GDP growth of 0.1% in the first quarter of 2023. The German economy has flatlined but Italy, Spain & France have continued to generate modest growth. This is reflected in their respective stock market performance, with the DAX up 5.1% this year but severely lagging the Italian MIB Index (16.0%), Spanish IBEX (14.2%) and French CAC40 (16.8%). The southern European states are faring best on an economic front, which marks a significant reversal from ten years ago.
Emerging Markets
The ‘emerging markets’ classification captures 24 countries. However, 80% of the MSCI Emerging Markets Index consists of China, Taiwan, India, South Korea and Brazil. Returns vary greatly between different countries within this basket, but the index is up 3.0% year-to-date. Chinese stocks hope to benefit from a full economic reopening after covid controls were lifted, as well as government stimulus following the bursting of a property bubble last year. It is worth noting Taiwanese and Korean per-capita GDP is actually equivalent to that of Japan, making their ‘emerging’ label somewhat curious. Asia may offer a good opportunity for diversification, with the Japanese stock market approaching its 2021 highs.
Bonds
Government bond yields are among the most important measures in global finance, acting as the benchmark which most other assets are priced against. They also play a key role in determining mortgage rates. Bond yields shot higher from August 2020 to October 2022, but have remained in a sideways range since then. It may be no coincidence that financial markets and western economies have become less turbulent in recent months. Corporate bonds are pricing in a very low default rate despite sluggish growth in the US and the UK. If a recession does materialise in the second half of 2023, government bond yields would be expected to decline, creating strong short-term returns. The UK 10-year gilt yield is currently 3.65%.
Points of Interest
UK house prices were up 0.5% in April versus economists’ expectations of a 0.4% decline. This is the first monthly increase since August and provides further evidence that house prices may be stabilising, after the uptick in new mortgage approvals which we noted last month.
The price of oil continues to decline. Brent crude fell 14% in April to $73 per barrel, from a peak of $139 in March 2022. Energy stocks are the worst performers so far in 2023. Likewise, container shipping rates have plummeted back to the pre-pandemic level of $1,500 from a peak of $10,000. Lower freight costs will benefit the UK’s non-food retailers, as shipping costs can equate to a significant proportion of sales and 95% of imported goods arrive by sea. UK consumer confidence remains low but is now improving at the quickest rate since the covid vaccine rollout of 2020-21.
UK wages have increased 6.5% year-on-year which is higher than the 4.5% figure recorded in the EU & US. Strike action no doubt contributed, but a CBI survey also found the number of companies struggling to find both skilled & unskilled workers is at the highest level since 1975. The number of available workers remains below pre-pandemic levels while the number of available jobs has increased. It may prove difficult for inflation to fall while such a labour shortage persists, but a strong employment market could stave off the threat of a UK recession.
Summary
It is often said that “markets climb a wall of worry” and 2023 is perhaps a good example. High inflation and mediocre growth haven’t prevented the stock market from generating good returns so far this year. Markets react quickly to the rate of change and things have become slightly less bleak since late last year. Professional fund managers certainly report plenty to worry about. Leading economic indicators point to slowing growth in the US and those predicting a US recession in late-2023 have grown in number. However, the market is not the economy and stocks appear to be navigating their way through the turbulence, for the time being at least.
Please note that any performance figures are provided for information purposes only. Past performance is not a reliable indicator of future returns.
