Weekly house view | Big is beautiful, small is smart
First-quarter performances for different asset classes make for interesting reading. Over the period, the S&P 500 gained 7.5% and the Nasdaq 17% (both performance in USD)—the latter index’s best quarterly performance in almost three years. But the small-cap Russell 2000 trailed in Q1, recording a total return of just 2.7% (in USD). Consistent with our investment theme of convergence of risk premia, European indexes did better than their US counterparts, with the Euro Stoxx 50 achieving a total return of 14.3% and the Stoxx Europe 600 by 8.5% over the quarter (both performances in euro). This was the fourth consecutive quarter the Stoxx Europe 600 outperformed the S&P 500—the longest stretch of outperformance in 15 years. Asian markets trailed US and European markets but were still positive. Credit markets all performed positively thanks to the drop in sovereign yields, with US investment-grade and noninvestment-grade corporate debt outperforming their European equivalents. Asian corporate credit was also positive in Q1. Over the same period gold benefitted from banking stress and the drop in US bond yields, rising by 8% in USD. The impact of banking stress and high interest rates could also be seen in the drop in global M&A to a 10-year low in Q1. UK house prices dropped at their fastest pace in 14 years in March, while Swedish retail sales declined for the 10th consecutive month in February on an annualised basis. Both the UK and Sweden are countries where variable-rate mortgages dominate. With the past year’s rate increases starting to bite, we reiterate our preference for fixed-rate debt versus floating-rate debt.
One positive sign last week was the drop in bank borrowing from the Federal Reserve for the first time since the takeover of SVB. But investors remain vigilant for further signs of stress in US banking. Unsurprisingly, the White House is proposing to tighten regulations on mid-sized banks— possibly leading to tighter credit conditions. On another more positive note, figures last week showed that the annual core personal-consumption index (one of the Fed’s favourite inflation gauges) fell from 4.7% in January to 4.6% in February. While still high, this is slightly below the mid-point of the fed fund’s rate and could be considered by the Fed as a sign of success in its fight against inflation. In the euro area, while flash estimates showed that headline inflation fell sharply in March, core inflation accelerated to an annual 5.7%from 5.6% the previous month—providing ammunition to the European Central Bank hawks.
Some relaxation in banking stress as well as inflation data helped equities to move higher in all regions last week. The announced split of Alibaba into six entities should help unlock value in Chinese tech more generally and comforts our overweight stance on Chinese equities. This week will see a stream of important data, including purchasing manager indexes and the March nonfarm payrolls report in the US. Corporate guidance will be a focus as the Q1 reporting season starts.