Despite markets experiencing banking sector inspired drama last month, both equity and bond markets reported solid gains in the first quarter of 2023. Performance across most of our funds was strong during the quarter and marks a welcome change from 2022.
It has been great to reconnect with many of our clients at our recent roadshows. We talked about the challenges markets have been grappling with, contextualised last year’s bear market, and provided some thoughts on what might come next. So far in 2023 our roadshow theme of “a bumpy road, but a better destination” seems to be playing out, with both equity and bond markets rallying in Q1.
A better start in 2023
Equity markets had a buoyant start to the year despite ructions in the banking sector last month. The MSCI World Index gained 7.3% for the quarter – with most geographies higher (including the US, Europe, New Zealand and Australia) and technology heavy indices like the Nasdaq Composite (+16.8%) making the biggest moves.
There was finally some good news for fixed income investors. Last year’s rapid rise in interest rates set investors up for a better start to 2023, and key bond market indices have gained around 3% so far this year.
The failure of Silicon Valley Bank provided an unwanted flashback to the US subprime crisis in 2008 and led to rapid deposit outflows at several otherwise sound banks like Signature Bank and Credit Suisse. The failure of Silicon Valley Bank and Signature Bank caused regulators to step in and protect depositors, while also providing substantial liquidity to the broader banking sector. The risk of contagion seems to have been mitigated by these interventions for the time being. The fact that the banking sector is in significantly better shape compared to the global financial crisis (from a credit quality, liquidity and capital adequacy perspective) should also provide comfort to depositors and regulators alike. After initial banking-inspired declines in early March, markets closed the month back at their highs.
We witnessed much better performance across our flagship growth funds in the first quarter, with the majority of our high conviction equity strategies outperforming the market.
Q1 witnessed a reversal of many of 2022’s trends
There was a lot going on beneath the headline moves in market indices this quarter. Last year rising interest rates and inflation led to the outperformance of energy companies and banks, while technology and other growth companies underperformed. But the consequences of these rising interest rates, such as slowing growth and banking sector stress, have in turn caused interest rates and energy prices to reverse course and fall from their highs, hitting banks and energy companies in 2023.
Another good example of reflexivity in markets is with selected technology companies. The share prices of many technology companies were hit hard in 2022, due in part to rampant expense growth and slowing revenue growth (after the COVID- driven surge in demand). Many of these big tech companies have rebounded strongly in 2023 as they respond to these cost pressures and weak share prices by reducing headcount to lift earnings – with Meta, Microsoft and Salesforce being good examples of this. Others have responded by pulling growth levers. Netflix, for example, responded to the slowdown in subscriber growth by offering an ad-supported tier which is now seeing new users join the platform for the first time. Some companies have more ability to control their destiny than others. This is why we prefer business that have options at their disposal (be it growth levers, pricing power, or high incremental profit margins), rather than those that are highly exposed to factors outside of their control like interest rates and commodity prices.
Screening for risks, but optimistic about the outlook
2023 won’t necessarily be all smooth sailing. There are still some risks that investors are grappling with – from stubbornly high inflation, to rising mortgage rates and the risk of recession.
As always, we have been actively reviewing our exposure to these sorts of risks and repositioning our portfolios where appropriate. Focusing on high quality companies, with low leverage, and options at their disposal to manage costs and drive growth are always important – but especially so in an environment of heightened economic uncertainty.
While we are taking a cautious approach to company selection, when we look at the businesses we own (and the investment opportunity set more broadly), we are optimistic about the medium and long-term outlook for our portfolios.