Investment guide

Quarterly market update

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Q1 2023: Mass support soothes banking sector stress

Investment highlights from 1 January to 31 March 2023

Published: April 2023

At a glance

  • The banking sector came under pressure but authorities’ swift action eased investor concerns.
  • The US Federal Reserve (Fed) and Bank of England (BoE) raised interest rates again, but there are signs they could peak sooner than previously expected.
  • Tackling inflation remains a key priority for central banks, and therefore a key factor for investors. 

Market matters

Three developments this quarter relevant to NatWest Invest

Authorities ease banking stress

March was an eventful month for the financial sector as banks in both the US and Europe came under pressure. In the US, we saw the collapse of Silicon Valley Bank (SVB) as rising interest rates impacted its lack of diversification and uncommon business model. And across the Atlantic, it was Credit Suisse’ long standing issues that led to it being bought by rival bank UBS.

Our view: These events were very specific to the banks concerned rather than part of any wider, systemic issue. Investors’ nerves were soon settled by how quickly and effectively the authorities were able to step in and help ease the stress. The US Federal Reserve (Fed) provided emergency funding to the wider banking sector while Swiss regulators worked overtime to get the Credit Suisse-UBS deal finalised on short notice.  

Peaking interest rates?

In the all-important US, there was uncertainty around what the Fed might do ahead of its rate announcement in March following what happened to SVB. Investors and economists were divided on whether the central bank would cut, stick or raise rates further. In the end, it announced another 0.25% hike, but comments from Chairman Jerome Powell suggested the peak could be near. Likewise in the UK, the BoE also raised rates by 0.25%, in line with expectations.

Our view: The Fed said it took the recent situation in the banking sector into consideration when making its decision to raise interest rates, which suggested rates could near their peak sooner than expected. The language used around any further rate rises was softer as the central bank acknowledged the stress any further limits on bank lending could mean for the economy. However, Jerome Powell wouldn’t comment on when rate cuts might begin. 

Inflation remains priority

Despite the pressure that elevated rates are having on markets and economies, central banks across the globe have said that bringing down inflation remains the top priority. In the US, year-on-year inflation fell to 6%, down from 6.4% the month before. This still remains above the Fed’s target of 2%. For the UK, however, inflation is proving a little sticky having picked up some pace again after falling over the previous three months.

Our view: Our funds and portfolios remain cautiously positioned. We became more defensive ahead of March’s events as our outlook for 2023 predicted a recession, which we believe could still be on the cards for the US. 

The big number: 10.6%

The UK’s year-on-year inflation for February, up from 10.1%. Despite having fallen for three consecutive months, inflation picked up pace again with food and drink being a key driver.

Managing your money

Changes the investment team at Coutts have made include:

Shift from US equities to Emerging Markets

With indicators still suggesting a potential recession in the US, we reduced our exposure to US stocks, replacing it with emerging market equities. We see emerging markets potentially benefitting from China reopening its economy. 

Buying more US Treasuries

We’ve increased our exposure to US government bonds. Bonds could benefit from peaking inflation and less aggressive interest rate hikes, and from a US recession as investors move to the relative security they can provide over stocks.  

Learn more about investments

Whether you’re an experienced investor or just finding out what investing is, we’ve got a range of articles to help you understand more about investing.

We regularly update our articles depending on what’s happening in the market so check back for future updates.

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