April gave investors some respite after an eventful March. Economic data remained resilient, although stresses in the banking system persisted. Equities continued to rise, bonds fared well though bank woes, wage inflation and the potential for a US government default weighed on investors' minds. Headwinds picked up once more at the end of April as we continued to see a fallout from monetary tightening in the financial sector. Another US bank closure increased investor concerns about liquidity risks which could lead to an issue of solvency.
The MSCI Europe ex-UK index reported European stocks were up 2.05% at the end of April. This was driven by positive economic data and earnings surprising to the upside following a turbulent month of March, which saw the collapse of two US regional lenders and the Swiss state-sponsored rescue of Credit Suisse. Manufacturing continued to contract, with the tenth consecutive month of contraction in the PMI (Purchasing Managers Index)1. Meanwhile, the services ISM (Services Purchasing Managers Index)2 continued to rise, keeping GDP growth positive for the first quarter. Inflation fell in the region due to a decrease in energy prices.
Defensive sectors such as real estate and healthcare led the European stock market higher, outpacing regional tech and miners, which ended the month underwater.
UK data echoed our neighbours in Europe. Service PMIs continued to expand, beating expectations, while manufacturing PMIs continued to contract. Inflation fell to 10.1% as fuel disinflation ate into the headline number. Although it is pleasing to see inflation coming down, it is still higher than the consensus of economists surveyed anticipated as a result of rising food prices. Core inflation was flat, surprising analysts who had anticipated it slipping. (Core inflation is the change in the costs of goods and services but does not include those from the food and energy sectors).
The Cboe UK All Companies index rose over the period, closing 3.29% higher. This was helped by exposure to resilient domestic and global value stocks, making it the strongest-performing developed market of those covered in this report.
Major US tech firms reported strong earnings in the last trading week of April, giving a boost to the region's indices. However, it wasn’t enough to move the tech-laden Nasdaq into the top spot over the S&P 500 or the Dow Jones. It was a solid month for the US with economic data confirming inflation has started to cool, which could allow the Federal Reserve to push the pause button after this week's rate hike on the 3rd May 2023.
Each US index posted gains in April. The S&P 500, the best-performing of the three main indices, was up 1.53%, helped by a mix of traditional value stocks dominating over the period alongside the boost from tech stocks towards month end. Despite this boost, the US lagged behind the European indices. The Nasdaq and Dow Jones closed up 0.52% and 1% respectively over the month.
Japan's central bank chose to stick with negative rates as Governor Kazuo Ueda chaired his first monetary policy meeting. The major change to guidance was the Bank of Japan (BoJ) signalling it will take additional easing measures if necessary. Otherwise, there was little in the way of major economic news from the region reported over the period. Japan’s TOPIX index returned 2.70% in April.
Emerging markets were the worst-performing cohort, lowered by Asian markets. This was despite China reporting better than expected GDP numbers for the first quarter, supported by its reopening. Retail sales in the region also surprised, rising higher than expected. Any optimism the data gave was eclipsed by geopolitics. Reports that the US plans to implement tighter investment regulations hit stock returns, which reverberated around China’s Asian trading partners. The MSCI Emerging Market index ended the month down, returning -0.70%. India was the one bright spot in the emerging market cohort, with the MSCI India index rising 3.73% for the month.
More generally, the International Monetary Fund (IMF) published its growth forecasts in early April. It warned that global growth will likely turn lower in 2023, with advanced economies' output forecasted to be less than half the rate seen in 2022. It anticipates the US economy to grow by 1.6% this year and by 1.1% in 2024, while it believes the German and UK economies are set to contract this year by 0.1% and 0.3% respectively. Emerging market economies are anticipated to fare slightly better.
The IMF suggests that ‘once the current inflationary episode has passed, interest rates are likely to revert toward pre-pandemic levels in advanced economies.’ The extent to which rates fall will depend on ‘whether alternative scenarios involving persistently higher government debt and deficit or financial fragmentation materialise.’ While some may roll their eyes at the IMF's forecasting, it paints a vision that should not be dismissed out-of-hand, as the emergence of stress in financial markets from bank rescues of SBV, Credit Suisse, First Republic Bank and more complicates the task of central banks, as they seek to maintain the path towards higher interest rates in the face of stubbornly high inflation.
1 The Purchasing Managers Index, or PMI, is a monthly survey of the manufacturing industry and is used as an indicator for outlook purposes
2 The Services Purchasing Managers Index, or ISM, is a monthly survey of the services industry and is used as an indicator for outlook purposes
Most assets ended April in the black. Commodities were the worst-performing asset class and the only one to end the month underwater. Equities were the best performing followed by property and then bonds.
In bond markets, concerns are building that the US Treasury could hit its debt limits in the coming months. This could lead investors to shun bonds that fall due in that timeframe in favour of bonds that fall due in a month from now, as a standoff over raising the ceiling could inject risk into traditionally ‘riskless’ treasuries. Additionally, in the US, individuals and retail investors have been increasingly reducing their bank deposits and using cash to purchase short-dated treasuries. This is in part a result of low bank deposit rates and concerns over US regional bank liquidity. US Treasuries ended the month up 0.53%. UK Gilts were the worst-performing major developed market sovereign bonds, down -1.78% on the back of hot wage growth data and core inflation remaining stubbornly entrenched. Overall, based on the Bloomberg Global Aggregate index, bonds fared well over the month up 0.44%.
Global property posted a gain of 1.43%, the first in many months.
Gold, after its run higher in March, consolidated gains to close April lower, returning -0.51%. Commodities in general also closed the month lower, returning -2.37% and were the worst-performing asset class over the period.
Equities, as represented in this report by the MSCI World Index, gained 1.60%, making it the best-performing asset class of those measured in this report.
Considerations for long-term investors
If the warnings of the IMF are to be heeded, investors might be looking to build positions in developed market government-issued bonds and/or gold. While it is hard to foresee the event(s) that could lead to interest rates falling back to pre-pandemic levels, there are a few things we can be fairly certain of. One of which is that government bonds and gold have historically provided some sanctuary in times of market stress and can act as good diversifiers for an equity portfolio. 10-year US government bonds are currently paying c.3.4% with yields slightly higher on UK 10-year Gilts. (3) Investors building a position in a fund with exposure to these assets should fare well if rates do move back to pre-pandemic levels. (Remember, bond prices and yields have an inverse relationship. When one goes up, the other goes down and vice versa). In addition, investors in other assets such as equities are equally likely to seek shelter in government bonds in times of market stress, causing prices to rise and yields to align with rates.
Gold is seen as a safe-haven asset for investors who prioritise preserving their capital in unfavourable economic conditions. Because of its historic resilience, many investors use it as a source of liquidity in periods of market weakness, either to cover shortfalls in other assets or as a means of raising capital to buy into other assets at distressed prices.
Sources: FE Analytics (monthly performance figures for funds and market 31/03/2023 to 30/04/2023). Qualitative commentary from TILLIT meetings with fund managers.
(1) Source: UK headline inflation
(2) Source: IMF growth forecasts, ‘A Rocky Recovery’, April 2023
(3) Source: UK 2-year Gilt yield and US 2-year Treasury yields
Date of publication: 5th May 2023
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