Monthly Commentary | April 23

Q1 has been a good quarter for global equities. Having been down almost 30% at one stage during 2022, the benchmark has now recovered about half of those losses. Q1 was not without volatility, however – particularly in March. The month started relatively quietly, with equity markets consolidating gains made earlier in the year.

Then came Silicon Valley Bank (the 16th biggest bank in the US at the time, in terms of consolidated assets) collapse on 10 March. Other regional banks suffered deposit flight consequently, with Signature Bank also failing. Gauges of financial conditions tightened on the announcement of SVB’s failure but quickly loosened again as the Federal Reserve stepped in.

Similarly, BBB spreads widened before ending the month relatively unchanged. One of the more lasting impacts of these developments was on interest rate expectations. Movements in interest rates have been the main driver of returns this year with large fluctuations due to considerable uncertainty around inflation, economic activity and changing expectations for central bank actions. For example, NZ interest rates made new highs early March on the view that central banks would have to hike more and hold rates higher for longer in response to “sticky” inflation.

Subsequently rates fell significantly with offshore banking sector concerns and fears for financial stability. From a sector return perspective, the return differential between swap and government bonds has been relatively modest, although longer swaps outperformed governments in March. NZ credit has performed surprisingly well relative to offshore with margins little changed. The retail bid and volume of money looking for a home has been solid, but we are starting to see investors becoming “more picky” especially since bond yields have fallen and look less attractive relative to retail deposit rates.