Following a fairly optimistic start to the year, market volatility has resumed this month following the collapse of Silicon Valley Bank. Rising inflation and interest rates continue to be key themes, despite the optimistic predictions made in the recent Budget announcement.
The Spring Budget
The Budget announcement on 15th March included several small changes and a few surprises. The headline points are:
- The pension Lifetime Allowance is to be abolished, with the Annual Allowance increasing to £60,000. The Money Purchase Annual Allowance, which restricts tax relief for pension scheme members who have already taken benefits, will rise to £10,000.
- Inflation is expected to be brought under control later this year, with a rate of 2.9% predicted by the end of 2023.
- The energy price cap will remain at £2,500 instead of increasing to £3,000.
- Measures are being put in place to boost the workforce, including apprenticeships for over-50s, increased childcare provision, more stringent requirements for Universal Credit claimants seeking work, and relaxed immigration rules for construction workers.
- Significant investments to be made into research and development.
While many welcomed the changes in pension taxation, the Budget was heavily criticised for not going far enough to support families and businesses despite continuing cost of living pressures.
Another Banking Crisis?
One of the main factors affecting markets this month is the collapse of Silicon Valley Bank (SVB) and subsequent problems in the banking sector. The failure of the California-based lender seemed to happen overnight, but resulted from long-running issues with the bank’s management. This is the second largest banking failure in US history, and has sent ripples throughout financial markets.
Put simply, the bank benefited from the tech boom over the last few years and sought to invest more of its assets in longer-term investments. When customers decided to withdraw large sums of money, the balance sheet could not cope.
SVB UK has been acquired by HSBC, which should provide some reassurance to customers.
Further failures in the banking sector have since occurred, including Signature Bank and Credit Suisse, although the latter has now been sold to UBS.
These failures are reminiscent of the start of the financial crisis in 2008, which saw the collapse of Northern Rock, Lehman Brothers, and Bear Stearns. It has been suggested that tighter controls in the banking sector are required to avoid this happening again.
Interest Rates Rise Again
Despite the positive forecasts in the Budget, inflation is still at an unsustainably high level. The Consumer Price Index rose by 10.4% in the 12 months to March 2023, just as price increases were predicted to ease.
The Bank of England took the decision to increase the base rate once again, to 4.25%. They are still taking the view that inflation is likely to fall rapidly before the summer. Economists are split on whether rates have now peaked or if further action will be necessary.
The US Federal Reserve increased interest rates to 5% this month, the highest rate since 2007. However, following the turmoil in the banking sector, it has been suggested that rates cannot go much higher without damaging the economy. Higher interest rates mean tougher lending conditions, which is bad news for lenders and borrowers.
The danger of increasing interest rates too quickly is that it could stifle the economy, potentially accelerating a recession.
As a result of the interest rate increases, investors are turning more to cash, money market funds, and bonds, which are delivering a reasonable return with lower risks than equities. While bonds suffered significant volatility last year, it is believed that some normality is now returning.
The UK Market
The UK market has seen a downturn this month, with both the FTSE 100 and the UK All Companies sector dipping by around nearly 7% at one point to end the month down 3%. Despite a fairly buoyant start to the month, the subsequent weeks have generally remained negative. Factors such as the increase to interest rates, the unfolding banking crisis, and a reduction in the value of Sterling appear to have contributed.
Top performers this month include financial administrator Capita plc, JD Wetherspoons, and Hochschild Mining, which are all showing returns of around 30% this month after a difficult few years.
The lowest performers this month include technology provider Kin and Carta, supply chain partner Wincanton, and retailer Currys, all of which have lost in excess of 30%. It is no surprise that several banks have also seen a dip in their share price, including Metro Bank, Virgin Money, and Barclays.
Corporate bonds have achieved modest growth this month. Index-linked gilts, which suffered the worst of the bond market volatility in 2022, have increased by over 5%.
The Global Outlook
Most of the main global markets have experienced volatility this month as a result of increasing interest rates and the problems in the banking sector.
Japan appears to be an outlier, showing a modest positive return this month. Japan had fairly low exposure to the banking failures that have dominated the news this month, but there are some concerns as to whether Japan’s own banks can withstand further interest rate rises.
The North American market has seen a substantial downturn this month following recent developments. Tech stocks have seen significant volatility – growth led companies are particularly sensitive to interest rates as many are reliant on borrowing and venture capital. However, the market suggests that investors believe rates are now close to a peak, and that stability may shortly return.
The Asia Pacific sector saw significant gains at the start of the year but has dipped throughout the second half of March. Regulatory crackdowns in the tech sector and the exodus of several prominent entrepreneurs continue to put pressure on the Chinese economy. But tech stocks have started to rally following the announcement that Alibaba, one of its largest companies, will be undergoing a restructure.
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The value of investments can fall as well as rise and is not guaranteed. Past performance is not a guide to future performance.
The content in this article was correct on 03/04/2023.
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