March was a challenging month for markets with the global banking sector returning to the spotlight. Recent strong economic data has been overshadowed by the speedy demise of Silicon Valley Bank, SVB.
Whilst largely unconnected markets have been in search and destroy mode and will seek out the most vulnerable institutions. Credit Suisse was the immediate European victim. Given the series of scandals that have plagued the bank in recent years, the bank was subsequently taken over by its compatriot, UBS.
The market was concerned by the potential fallout and the possibility and spread of contagion for similar banking entities. However, one positive which can be taken was the speed and the agility with which policy makers have acted to provide support for markets and the banking sector. In particular, both the breadth and the depth of the policy tools used by the Federal Reserve and other central banks.
The Federal Deposit Insurance Scheme in the US was quick to announce depositors with over $250,000 with SVB would be covered under their insurance. Whilst these stories have dominated news headlines, the focus is still very much on seeing continued falls in the levels of both headline and core inflation.
Turning to growth assets, over the month US Tech bucked the trend, outperforming heavily as most global indices fell as investors turned risk off.
UK markets struggled with their bias towards financials, whilst energy stocks also weighed heavily. Looking at factor performance through March, investors returned to quality and growth. These were the only factors to finish the month positive. Small-cap and value lagged.
Small-cap had a particularly volatile quarter. It had been one of the best performing factors since the turn of the year, but finished flat as it gave up all its gains in March.
Turning to defensive assets, government bond prices rose in March with yields coming down as investors moved towards Safe Haven assets following the issues in the banking sector.
Expectations for rate rises also fell as there was an added expectation on central banks that they would need to support the banking sector. The benchmark 10-year US Treasury yield fell from 4.01% at the start of the month to 3.48 by month end.
In summary, the banking shock spooked markets and quality came firmly back in focus. Economic data continues to improve and inflation and interest rates remain the key economic indicators. The one certainty is volatility, and market participants should remember in such times long-term investing is rewarded and controlling emotion is imperative.
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