Market update: First quarter 2023

The first quarter of this year brought a positive investment return for all investment categories. Global equity investments had the highest (+5%) return. However, the financial markets were also rocked by scandals in the banking sector. Is more turbulence to be expected, and what impact does this have on your investment plans?

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Banking Scandals

In the U.S., some regional savings banks ran into trouble. Silicon Valley Bank and Signature Bank failed, and the share price of First Republic Bank collapsed. The risk management at these banks was poor. This is because less stringent rules apply to small regional banks in the U.S. than to larger banks. Good to know: within the European Union, the same capital requirements apply to banks, regardless of their size. 

In Switzerland, which is not a member of the E.U., the centuries-old bank Credit Suisse succumbed to various scandals. To prevent further problems, the supervisor forced a takeover of Credit Suisse by their Swiss banking colleague UBS. This led to losses in the equity portfolio on positions in these banks. What does this mean for the investment plans? 

Because Vive only invests in well-diversified, passively managed equity funds, a single bankruptcy can never have a major impact on the return. The positions held by these funds in a single company are proportional to the total (market) value of that company, the market capitalisation. 

There is therefore no speculation on more favourable price developments of a single company compared to other companies. In the equity investments in your investment plans, there was a minimal position in Silicon Valley Bank, Signature Bank, First Republic Bank, and Credit Suisse. A total of 0.09%. The loss suffered from this is approximately 0.08% of the equity investments. 

This was very different for the largest pension fund in Sweden: Alecta. Alecta was found to have a multiple of the proportional holding, based on market capitalisation, of Silicon Valley Bank in their portfolio, causing them to suffer large losses. The investment director was consequently dismissed as a result of this multimillion-loss.  

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Best fund performance in the first quarter: Northern Trust World Custom ESG Equity Index Fund +5.05%

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The past quarter brought a positive investment return for all investment categories. Equity markets are anticipating a cautiously favourable earnings scenario for the business community.

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Can we expect more turbulence? 

It is not expected that more unrest will occur. The developments and scandals in the banking sector are isolated incidents and will not trigger a chain reaction like in the 2008 credit crisis. 

Interest rate development will primarily be driven by the policy of central banks to keep inflation in check. The Federal Reserve (FED) of the United States raised the interest rate to 4.75% - 5.00% in March 2023, a sharp increase of two percentage points since the end of last year. The European Central Bank (ECB) is also pursuing a policy of interest rate hikes. The goal is to turn the inflation increase into an inflation decrease, down to the level of the inflation target (around 2%). Investors expect the ECB to succeed in this, as long-term interest rates are around 2.5% at the end of March, while the short-term rate is above 2.8%. 

Bringing inflation under control will eventually be positive for the economy, as it prevents a wage-price spiral. Such a wage-price spiral can arise if increased labour costs per product are passed on in prices, and the resulting higher prices in turn lead to higher wage demands.

The short-term interest rate hikes will affect companies that are financed with short-term borrowed capital as they will start paying higher interest rates. Companies with margins that are too low may run into trouble as a result. 

‍Geopolitical tensions in the world also continue to influence the financial markets. The war in Ukraine is affecting the prices of grain and oil. The escalating tension between China and Taiwan is making investors aware of the risks associated with dependencies in the supply chain of computer chips. 

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What does all this mean for my plans?

Do not let the market disrupt your long-term goals. Consistently sticking to your investment strategy with well-diversified portfolios is the key to success in the long term. 

Vive's investment strategies take into account the risks that are acceptable for your plan. Check the app to see how you have set your acceptable risk level for your investment plans. Fluctuations in the financial markets are no reason to adjust your risk. A change in your personal situation, however, may be. If you adjust your acceptable risk level such that your current investment portfolio must be adjusted, Vive will automatically take care of this. 

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Good to know

Vive's statements are compiled to inform and entertain. The content should not be considered financial advice. Asset management involves risks.

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