Investment market update: March 2023

As inflation persists, central banks were forced to announce further rises to interest rates in March.

Coupled with the collapse of Silicon Valley Bank, it has been an uncertain few weeks in the world economy.

As an investor, remember that volatility in the markets is normal. Take a long-term view of your portfolio’s performance and focus on your overall goals rather than short-term market movements.

Here are some of the factors that affected markets in March 2023.

UK

After hitting a new record high in February 2023, the FTSE 100 fell back in March. Indeed, in mid-March, the index suffered its worst day of trading since the start of the Covid-19 pandemic.

Overshadowing the spring Budget and sparked by fears over the health of the global banking sector, the FTSE 100 closed 292.66 points lower – around 3.8% – on 15 March.

In a Budget the chancellor called “a plan for growth”, the key announcements included:

• An extension of the Energy Price Guarantee scheme until the end of June 2023
• The removal of the pensions Lifetime Allowance (LTA) tax charge from 2023/24, with plans to abolish the LTA in a future Finance Bill
• A year-long extension to the 5p cut to fuel duty on petrol and diesel, due to end in April
• Rises in various pension allowances to encourage more tax-efficient retirement saving
• Plans to create a dozen new investment zones that could become “12 potential Canary Wharfs”
• A policy of “full capital expensing”, initially for the next three years, which will allow firms to write off all investment against their tax bills.

While the UK remains the only country among the G7 major economies that has yet to fully recover its lost output during the Covid-19 pandemic, it is defying predictions of a recession.

The UK economy grew by 0.3% in January with the largest contributions to growth coming from education, transport and storage, and arts, entertainment and recreation activities, all of which have rebounded after falls in December 2022.

Inflation unexpectedly rose in the year to February 2022, with the Office for National Statistics reporting that rises in restaurant and cafe, food, and clothing costs pushed the annual rate up to 10.4%.

This led to the Bank of England increasing the base interest rate for the 11th consecutive time, to 4.25%.

Europe

Recession fears continue in the eurozone, with GDP growth revised down to 0.0% in the fourth quarter. Household consumption in the fourth quarter of 2022 saw the largest decline since the start of the eurozone in 1999, with the exception of during the Covid-19 pandemic.

Headline inflation in the eurozone remains high – it stood at 8.5% in February – and this led the European Central Bank (ECB) to increase interest rates by 0.5 percentage points in March. This pushes the bank’s main rate up to 3.5%, while the rate paid on eurozone bank deposits left at the ECB increases to 3%.

Christine Lagarde, the president of the ECB, said the central bank would treat the heightened tensions in financial markets separately from its strategy for bringing down inflation.

As with the leading UK and US indices, the STOXX 600 index fell in the aftermath of the SVB crisis, and has remained uncertain due to ongoing economic concerns.

US

The economic headlines in the US in March were dominated by the collapse of Silicon Valley Bank (SVB) – the country’s 16th largest bank.

Since the pandemic began, SVB had been buying lots of what are often considered “safe” assets such as US Treasury bonds and government-backed mortgage bonds. When interest rates started to rise sharply, their fixed interest payments didn’t keep up with rising rates.

Those assets were then no longer worth what SVB paid for them, and the bank was sitting on more than $17 billion in potential losses on those assets as of the end of last year.

In early March, SVB then faced a wave of $42 billion of deposit withdrawal requests. As it wasn’t able to raise the cash it needed to cover the outflows, regulators were forced to step in and close the bank.

While both the US and UK governments ensured that customers of the stricken bank were protected, it has raised fears of another global banking crisis. Indeed, Credit Suisse, one of the world’s oldest banks, was bought by rival UBS in a Swiss government-backed deal in March after regulators worked frantically to secure a deal for the loss-making bank.

Fears of another banking crisis have led to volatility in US markets, with some economists modestly lowering their forecasts for economic growth this year because of the SVB crisis as smaller banks restrict lending in an already weak environment.

Inflation in the US fell to 6% in February 2023, down from an annual rate of 6.4% in January and significantly lower than the 9.1% peak of inflation seen in June 2022.

Despite the uncertainty in the markets, the Fed raised interest rates by 0.25 percentage points in March, taking the upper limit of US interest rates to 5%, the highest level since 2007.

Please note: This blog is for general information only and does not constitute advice. The information is aimed at retail clients only.

The value of your investment can go down as well as up and you may not get back the full amount you invested. Past performance is not a reliable indicator of future performance.