Written By Marcus Rayer
Markets in the first quarter of 2023 have been on a bit of a rollercoaster ride, before a period of relative calm in April, where world market indices were somewhat flat.
This is as a result of opposing forces, rather than one of current stability. We are seeing gradually improving economic growth expectations, as well as corporate earnings remaining resilient. This would be suggestive of confidence for investment into risk assets. However, when we also consider the continued high levels of inflation, monetary policy will continue to be tightened by central banks to try and dampen economic activity, thus capping the current upside potential for investment in equities.
Although a US recession is widely expected by economists and investors, it is not factored into forward earnings estimates or valuations, both of which we expect to come under pressure. Another factor to consider over the summer will be the negotiations over the US Debt Ceiling.
More encouragingly, the fallout from March’s mini banking crisis has been limited, thus leading to confidence that a fully-fledged financial crisis is unlikely. This owes to the stronger regulatory rules put in place since the Great Financial Crisis of 2008.
The three contained US bankruptcies and the rescue of Credit Suisse by UBS could be viewed as a positive impact on the wider banking community. It has shown that the measures work and will help to discourage any ill-advised relaxation of controls on the financial sector preventing further problems in future.
While the major cyclical themes running through markets continue to revolve around inflation, monetary policy, as well as the risks of recession and downgrades to corporate earnings, there are currently three very specific areas experts remain focussed on: the US regional banking system; the US debt ceiling negotiations; and the first quarter earnings season.
It largely remains of opinion that the long and variable lags of monetary policy transmission are now showing signs in real economic activity. This economic cycle remains far from straightforward to read and people are rightly remaining somewhat cautious at the moment. However, it is clear that we are still seeing much more positivity and enthusiasm for investing this year than we were in 2022.
Written By Marcus Rayer
