Quarterly Market Update: Is a global recovery coming within reach?

After witnessing war, disease, and drought over the past few years, the spectre of banks beginning to fail wouldn’t have been welcome news last quarter.

Rising interest and inflation had helped put pressure on markets in general, and earlier this year, these pressures claimed a number of victims. In early March, Silicon Valley Bank (SVB) was told to shut its doors by US Regulators. This was followed a few days later by Swiss banking giant Credit Suisse collapsing, which ended in its sale to its former rival UBS.

While market participants took turns to price between the “inevitability” of another Lehmann moment, the “hard landing”, and the Fed being sufficiently concerned about these to slow or stop in its track the path of interest rate hikes, we ended the quarter with the stock markets generally up in the quarter, including even the banking sector. Of course, we’re not out of the woods yet, and we continue to monitor this area closely.

What the volatility has yet again confirmed to us, is the importance of a diverse investment portfolio. These banking sector failures were another great example of why we believe in this approach. The maximum combined exposure to both banks in any St. James’s Place funds was just 0.13%. In other words, you may have noticed a dip in your investments from wider market reactions, but you were relatively insulated compared to if either of these banks had made up a significant proportion of your holdings.

Back to the future

You may have noticed many of our articles contain a disclosure along the lines of ‘past performance is not indicative of future performance.’ Looking backwards has its use cases but, looking purely historically can lead to very different outcomes.

Let’s go back a decade to 2010. That was a year where most investors may remember as the year of emerging markets – until 2011 topped it. Robust domestic consumption, government expenditure and intra-regional trade offset weak external demand from developed markets, and this led many countries in Asia and Latin America to return to pre-crisis growth levels much faster than expected. China and India were among the world’s fastest-growing major economies during the year, with China overtaking Japan as the world’s second-biggest economy halfway through the year. Say we put all our eggs in the EM basket in 2010. Then, by the end of the decade, we’d have gained around 88% since the start of 2010, while we’d be looking at the MSCI World index that’s delivered a massive 167% return in that same period¹ – mostly driven by an unprecedentedly strong rise from US tech stocks.

The same applies today. Looking back to the volatility of 2022 may have anyone running to the comfort of hiding their hard-earned cash under their bed; but they may just find their longer-term returns eroded during this time out of the market and eaten away by the bedbug also known as inflation.

So, looking ahead then – is the future looking any brighter? One side effect of the global downturn last year is that it has provided our active fund managers with something of an opportunity – I talked about this in my last quarterly update. Even after the modest recovery since the start of this year, many companies are still trading at attractive prices.

From a more macro perspective, since the start of the year, the market is showing the seeds of recovery. Bond yields have become more attractive following the various rate increases, and equities have also performed relatively well. The US and UK have so far avoided a recession, and we are seeing even clearer green shoots in Asia, with strong export and non-manufacturing data reported for China in March, as the country’s 2023 GDP outlook was upgraded to 5.5% by S&P Global Ratings². The latter figure in itself may not seem overly impressive, but we should not forget that, with the size of China’s economy at US$18.1 trillion currently³, this growth alone equals the entire GDP of the Netherlands, and about 2 times that of Thailand. Given this backdrop, coupled with relatively undemanding valuations, lower inflationary pressures and diversification/correlation benefits, we have decided to largely maintain our exposure to Asia and EM markets from an asset allocation perspective for their rebound potential following a weaker performance in the past years.

Angelina Lai
Chief Investment Officer, Asia