The Cambridge Weekly – 6th March 2023

The Cambridge Weekly – 6th March 2023

Mood swings

For some time, bond and equity markets have been experiencing teenager-like mood swings. As February ended and March began, government bond yields continued their march higher to levels last seen last autumn, when stock markets tumbled as a result. Yet, this time, stock markets have ricocheted between optimism, namely the surprising resilience of consumer demand and resulting relative company earnings stability, and pessimism that the same economic resilience will keep inflation pressures high, forcing central banks to keep raising rates higher for longer, which undermines valuations and said resilience.

February 2023 review – growth proves resilient, but so does inflation

Last month proved a mixed bag for global investors. On the one hand, British and European assets had another decent month, buoyed by lower-than-expected energy prices and noticeably lower inflation numbers. This fed into the narrative of a slow but sustained recovery, allowing investors to wave goodbye to the woes of last year and look ahead to stable growth ahead. On the other hand, US and emerging market assets had a bad month, after bond yields rose yet again – pushing down equity valuations – and the speed of the Chinese economy reopening disappointed expectations. This led to an overall fall in global equities and bonds, which were down 1.2% and 1.7% respectively in sterling terms. These factors suggest we are far from in the clear. Growth is still slowing but not enough to suppress inflation sufficiently to have central banks relenting from further rounds of rate hikes. We may have climbed out of the depths, but the road ahead is long and arduous. The table below shows February’s returns across major asset classes and regions.

China – when is a bounce not a bounce

Chinese growth had been one of the biggest feel-good factors of the year so far. At the end of last year, President Xi Jinping reversed three years of zero-Covid policy, finally opening up the world’s second-largest economy and allowing its more than 1.4 billion population to move freely again. Investors were as shocked as they were delighted: Chinese equity markets rallied hard on the expectation of a strong recovery in consumer demand. At the same time, authorities in Beijing softened key policies for the ailing property sector and committed to significant fiscal and monetary stimulus. All in all, it was a rapid change from wholly restrictive policies to strongly pro-growth ones. Global investors got excited about a Chinese post-pandemic bounce that could be even bigger than what we saw in the west two years ago.