Market Commentary – May 2023

Monthly Market Commentary from Quilter Cheviot

By Duncan Gwyther, Chief Investment Officer

Market volatility reduced in April, with stock and bond markets experiencing calmer conditions. For sterling-based investors the MSCI All Country World ex UK Index was marginally negative for the month compared to a positive return on UK equities of 3.6%. Gilts yields rose and longer/index-dated issues fell sharply.

Although returns of late have been modest the return of calm has been a welcome development, following some of the panic that ensued in March as fears surrounding the health of the banking sector ratcheted up It should not come as a surprise that the speed and scale of the increases in benchmark interest rates over the last 15 months have had adverse consequences and banks can be particularly vulnerable due to their business models – they are often exposed to potential liquidity mis-matches due to typically lending money long term that is mostly funded from short-term borrowing.

Therefore, when rates rise faster in the short term than the long term, profits can be squeezed, and it can become increasingly difficult to attract sufficient deposits. Larger banks are less susceptible to this due to a greater degree of diversification. This dynamic is something we have seen many times before and the main issues now for markets, as far as we are concerned, is how the relevant authorities manage the rehabilitation process for the impacted regional banks and how successful they are in preventing widespread contagion. Central banks have the ability to print money at the requisite level to prevent a total collapse, but as this is at odds with their current inflation-fighting efforts, it remains to be seen how much appetite they have to go down this route.

Our view is that the situation will likely linger at a similar level to present conditions, providing a delicate balancing act. This will have an adverse impact on the broader economy, increasing the probability of a recession with general lending conditions tightening as standards are raised…

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