The first quarter of 2023 was punctuated by the collapse of Silicon Valley Bank (SVB) in the US. This was a forty-year-old bank that was about the 20th largest bank in the nation. It had grown rapidly over the years because of its connections with the US tech industry. This was followed by the collapse of another regional American bank and a run on the deposits of Credit Suisse, Switzerland’s second-largest bank. Credit Suisse was quickly taken over by Switzerland’s largest bank, UBS.
There was quite a bit of debate in the press about the likelihood of a global banking crisis, but most commentators thought not; the view was that hikes in interest rates had created stress at poorly or recklessly run banks which did not reflect the mainstream banking industry, which is now tightly regulated and well capitalised. This doesn’t mean that further failures will be avoided.
Naturally, the threat of a global banking crisis took its toll on the value of investments, which were turning in a decent quarter till the problems started and resulted in significant market volatility.
Behind the scenes, central banks were progressively tightening the screw with interest rates being slowly increased. The mini banking crisis resulted in a slowdown in the rate of increase and several commentators made the point that the affair would result in mainstream banks finding it harder to secure funding (or would have to pay more to obtain it) which will result in credit conditions tightening. The ‘crisis was reckoned to have added the equivalent of 1.0% to global interest rates, which are either at, or near the top, in my opinion.
Markets’ perceptions of the likely peak in interest rates meant that global bond markets rallied, scenting that the worst for interest rates would soon be over. The move in bond markets was also supported by a dramatic fall in the price of gas – which is now down to pre-conflict levels. It’s clear that global inflation will rapidly fall, maybe not quite back to 2.0%, but possibly quite close to this number – say 3-4%, which is a far cry from the current 10%+ level being felt by many economies.
Moving away from Western markets China’s post-COVID reopening continues and monetary stimulus is underway. Oil prices weakened over the quarter, which resulted in a production cut announced by OPEC. However, OPEC now faces stiff competition from domestic American oil companies which are now major players on the world stage.
What does all this mean for markets? Over the quarter the S&P500 index in the US was up +7.2%, the Eurostoxx50 was up +11.6% but our own FTSE All-share index was up only +0.9%. The latter reflected weakness in the oil and gas and latterly banking sectors, all of which are significant components in the index. The main Chinese index is down over the year at -2.4% but has now started to rise.
Here is a chart of global markets over one year.
…and over 5 years:
Outlook
The negative impact of the bank failures and the interest rate background have made me more optimistic that markets are either at, or approaching, a turning point. Please bear in mind I have no crystal ball.
I expect Western economies to flirt with recession and at this point, markets will be looking forward to the recovery and the benefits that lower interest rates will bring. This process has already started in China where monetary policy is now tilted towards an easement.
PORTFOLIO PERFORMANCE
I enclose tables showing the performance of all portfolios over various time periods to the end of March 2023.
Short-term performance
| Parmenion Portfolio/Index | Three months Performance to the 31 March | One year Performance to the 31 March |
|---|---|---|
| Risk Grade 4 (old Cautious Portfolio) | +1.3% | -6.3% |
| Average Mixed Investment fund (20-60% shares) | +1.6% | -4.8% |
| Risk Grade 6 (old Balanced Portfolio) | +1.4% | -11.7% |
| Average Mixed Investment fund (40-85% shares) | +2.0% | -4.5% |
| Risk Grade 8 (old Adventurous Portfolio) | +1.4% | -5.3% |
| Average Flexible Investment Fund | +1.6% | -4.0% |
| FTSE All-Share Index | +3.0% | +2.9% |
| FTSE World Index ex UK (£) | +4.8% | -0.9% |
| FTSE UK Gilts Index | +2.0% | -16.2% |
Long term performance
| Parmenion Portfolio/Index | Five year Performance to the 31 March | Ten year Performance to the 31 March |
|---|---|---|
| Risk Grade 4 (old Cautious Portfolio | +12.3% | +49.2% |
| Average Mixed Investment fund (20-60% shares) | +11.8% | +39.8% |
| Risk grade 6 (old Balanced Portfolio) | +25.1% | +78.8% |
| Average Mixed Investment fund (40-85% shares) | +21.8% | +64.4% |
| Risk grade 8 (old Adventurous Portfolio) | +29.9% | +127.4% |
| Average Flexible Investment Fund | +23.4% | +68.0% |
| FTSE All-Share Index | +27.8% | +75.8% |
| FTSE World Index ex UK (£) | +69.0% | +190.6% |
| FTSE UK Gilts Index | -14.4% | +5.0% |
PORTFOLIO REVIEW
All Portfolios
Risk Grade 4 Portfolio
The Risk Grade 4 Portfolio gained +1.3% over the quarter, underperforming its benchmark (the average mixed investment (20-60% shares) fund) which gained +1.6%.
We reduced our cash levels at the start of the year and sold our holdings in the M&G Inflation Linked Corporate Bond Fund, which had been a successful investment during the period when inflation was rising. We used these funds to commence a new significant position in the M&G Global Macro Bond Fund which attempts to manage bond exposure in accordance with large economic (“Macro”) themes.
We have enjoyed success with Fidelity American Special Situations and increased exposure to this fund by reducing our exposure to our US Tracker – the Vanguard US Equity Index.
Risk Grade 6 Portfolio
The Risk Grade 6 Portfolio gained +1.4% over the quarter, underperforming its benchmark (the average mixed investment (60-80% shares) fund) which gained +2.0%.
We reduced our cash levels at the start of the year and sold our holdings in the M&G Inflation Linked Corporate Bond Fund, which had been a successful investment during the period when inflation was rising. We used these funds to commence a new significant position in the M&G Global Macro Bond Fund which attempts to manage bond exposure in accordance with large economic (“Macro”) themes.
We have enjoyed success with Fidelity American Special Situations and increased exposure to this fund by reducing our exposure to our US Tracker – the Vanguard US Equity Index.
We reduced our exposure to a low-risk “Alternative Assets” portfolio run by BNY Mellon (the Sustainable Real Return Fund) and allocated the proceeds to the M&G Fund mentioned above.
Risk Grade 8 Portfolio
The Risk Grade 8 Portfolio gained +1.4% over the quarter, underperforming its benchmark (the average Flexible fund) which gained +1.6%.
The Risk Grade 6 Portfolio gained +1.4% over the quarter, underperforming its benchmark (the average mixed investment (60-80% shares) fund) which gained +2.0%.
We reduced our cash levels at the start of the year and sold our holdings in the M&G Inflation Linked Corporate Bond Fund, which had been a successful investment during the period when inflation was rising. We used these funds to commence a new significant position in the M&G Global Macro Bond Fund which attempts to manage bond exposure in accordance with large economic (“Macro”) themes.
We have enjoyed success with Fidelity American Special Situations and increased exposure to this fund by reducing our exposure to our US Tracker – the Vanguard US Equity Index.
We reduced our exposure to a low-risk “Alternative Assets” portfolio run by BNY Mellon (the Sustainable Real Return Fund) and allocated the proceeds to the M&G Fund mentioned above.
STRATEGY
We like fixed-income securities – especially global bonds, which tend to have high weightings to US Treasuries and bonds. Our view is that as inflation rolls over bonds have scope to appreciate on a low-risk basis. We are light UK bonds as we think the UK has a worse inflation outlook than most other Western economies, especially the US, where both the outlook for inflation and growth is better than here at home.
Although no adjustment was made this quarter, we still plan to progressively reduce our allocation to the UK market, which we think is past its best now the energy crisis is behind us. Better investment opportunities exist overseas.
Finally, we are reviewing our allocation to UK commercial property where the outlook for office properties is especially difficult. A combination of higher interest rates, flexible working practices and requirements to improve energy efficiency make this sector unattractive. We are exploring the world of infrastructure investments as an alternative diversification.
Best wishes,
Jim
Jim Aitkenhead BA(Hons)Econ FCII APFS ASCI
Chartered Financial Planner
