The Cambridge Weekly – 17th April 2023

The Cambridge Weekly – 17th April 2023

Return of calm bodes well for spring 

Easter lies behind us and the second quarter of the year ahead. Considering how unnerving the first three months of the year were, UK investors in globally diversified multi-asset portfolios (akin to the ones we manage) have not fared too badly. Mildly positive returns across the risk spectrum tell the story of another risk storm having passed without sinking global capital markets. If readers feel like they have heard and read it before, then that’s clearly the case. It’s not hard to recall recent risk storms and market corrections, such as last autumn’s government bond market upset, the summer’s growth scare, and the market reaction to Russia’s invasion of Ukraine, to name only three of the freshest ones.

Mixed risk signals abound

The US dollar has been notably weak this year. This is the reverse of what we saw in 2022, when aggressive rate rises from the US Federal Reserve (Fed) and fears of a global economic slowdown pushed investors towards the world’s reserve currency.

When looking at how strong or weak a currency is, one needs to look at its buying power versus not just one, but a number of other currencies. Economists like to pick the currencies of the main trading partners and vary the weights accorded to the currencies by the recent amounts of trade volumes. This is called a trade-weighted index. Investors tend to like something simpler. For the US dollar, most use the DXY index, a fixed blend of the euro, Japanese yen, sterling and three others. Unfortunately, though, in neither case does the index level provide much insight into any changes in the domestic purchasing power of the involved currencies. The information value of the DXY is limited to only telling us about the change in the purchasing power across currencies.

China’s rebound accelerates, while Beijing postpones political agenda 

At the start of the year, expectations were high for the Chinese economy. After years of stop-start lockdowns, Beijing pivoted away from its zero-Covid policy surprisingly quickly. At the same time, regulators eased up on the property sector and loosened financial conditions. Global investors recognised this as a potent mix for growth, which propelled a rally in China’s stock market. We agreed with these strong predictions at the time but noted it could take a while for significant growth to come through – in part, because the populace had been scarred by Covid, weak global conditions and seasonal disruptions.