SPW MarketWatch: April 2023

Source: FactSet, 3 May 2023. Figures represent monthly total returns for April 2023.

Decline in US economic growth

Annual economic growth in the US fell to 1.1 percent in the first three months of 2023, according to an estimate from the US Bureau of Economic Analysis, published on 27 April. Economic growth declined markedly from the 2.6 percent growth in the final three months of 2022.

The slowdown underlines the fact that Federal Reserve (Fed) actions to bring down inflation, through raising interest rates, are bearing fruit. It suggests consumers and businesses are reducing their spending, which can lower inflation. Since March 2022, the US central bank has lifted interest rates from almost zero to almost 5 percent at the time of writing (1).

We have been gradually positioning our multi-asset portfolios for a US economic slowdown, due to these higher interest rates. We take a cautious stance on US equities (shares), as we do with equities in general, although we note that North American equities rose by 1.3 percent in April. In contrast, we take a positive stance on US government bonds after we reduced our expectations of further US interest rate rises following turbulence in the banking sector. Government bond prices often go up when interest rates rise by less than expected.

Chinese shares drop in late April

Chinese equities declined sharply from 19 April, even though the country exceeded economic forecasts by reporting year-on-year 4.5 percent economic growth on 20 April (2). The fall in equities took place despite the Chinese government loosening Covid restrictions. These restrictions had limited the country’s economic activity.

Zou Lan, head of the monetary policy department at the People’s Bank of China, said on 20 April: ‘The scarring effect of the epidemic has yet to recede.’ In particular, he pointed out that consumer demand had not kept up with the increased supply of consumer goods that followed government measures to support factory production. This led factory gate prices to drop sharply (3).

Despite these challenges, we believe China’s economic activity has broadly improved and that service sector activity could be undergoing a strong rebound.

EU cuts gas consumption

Cutbacks by households and businesses drove EU natural gas consumption down by 17.7 percent in the eight months to March 2023, when compared with the average during the previous five years (4). The EU sought to reduce usage of Russian gas following the invasion of Ukraine.

A mild winter contributed to the decline in gas usage. But switches to other energy sources, shutdowns of some energy intensive industries and energy conservation measures also drove down gas consumption.

Reductions in gas usage also helped bring down gas prices, which, in turn, helped reduce eurozone inflation from 10.6 percent in October 2022 to 6.9 percent in March 2023 (5). Meanwhile, annual eurozone economic growth rose by 1.3 percent in the first quarter of 2023 (6).

We have a cautious stance on European equities, as we believe rising interest rates could raise financing costs for companies, with a negative impact on their profitability. We have a positive stance on European corporate bonds, which we consider attractively priced compared with other regions, but we have a neutral stance on corporate bonds in general.

Sources:

(1) Federal Reserve Bank of St Louis, ‘Fred Economic Data’, 2 May 2023.

(2) National Bureau of Statistics of China, ‘Preliminary Accounting Results of GDP for the First Quarter of 2023’, 20 April 2023.

(3) Reuters, ‘China’s central bank official dismisses long-term inflation scenario’, 20 April 2023.

(4) Eurostat, ‘EU gas consumption decreased by 17.7 percent’, 19 April 2023.

(5) Eurostat, ‘HICP – monthly data (annual rate of change)’, 2 May 2023.

(6) Eurostat, ‘Preliminary flash estimate for the first quarter of 2023’, 28 April 2023.