Market update: First quarter 2023

The first quarter of this year brought positive investment returns for all asset classes. Global equity investments experienced the highest (+5%) return. But the financial markets were also rocked by scandals in the banking sector. Is more turbulence to come, and how will this affect your investment plans?

Banking scandals

In the U.S., some regional savings banks ran into trouble. Silicon Valley Bank and Signature Bank went bankrupt, and First Republic Bank's stock price collapsed. Risk management at these banks was poor. This is because small regional banks in the U.S. are subject to less stringent regulations than larger banks. Good to know: within the European Union, the same capital requirements apply to banks of all sizes. 

In Switzerland, which is not a member of the E.U., the century-old bank Credit Suisse went down in several scandals. The regulator, to prevent further problems, forced a takeover of Credit Suisse by their fellow Swiss banking institution UBS. As a result, equity portfolio losses occurred on positions in these banks. What does this mean for investment plans? 

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

Therefore, there is no speculation on more favorable price movements of a single company, relative to other companies. In the equity investments in your investment plans, there has been a minute position in Silicon Valley Bank, Signature Bank, First Republic bank and in Credit Suisse. A total of 0.09%. The loss incurred from these is about 0.08% of equity investments. 

It was very different at the largest pension fund in Sweden: Alecta. Alecta turned out to have a multiple of the ratio, by market capitalization, of Silicon Valley Bank in their portfolio, so it suffered huge losses. Consequently, as a result of this loss of millions, the director of investments was fired.  

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

Last quarter brought positive investment returns for all asset classes. Equity markets are anticipating a cautiously favorable corporate earnings scenario.

Can we expect more turbulence? 

More turmoil is not to be expected. The developments and scandals in the banking sector are isolated, and will not trigger a chain reaction as in the 2008 credit crisis. 

Interest rate trends will be driven primarily by central bank policies to curb inflation. The United States Federal Reserve (Fed) raised interest rates in March 2023 to 4.75% - 5.00%, a sharp increase of two percentage points since late last year. The European Central Bank (ECB) is also pursuing a policy of raising interest rates. With the aim of turning the rise in inflation into inflation decline, to the level of the inflation target (around 2%). Investors expect that the ECB will succeed in this, because as of the end of March, long-term interest rates are around the 2.5% level, while short-term rates are above 2.8%. 

Getting inflation under control will eventually be positive for the economy because it prevents a wage-price spiral. Such a wage-price spiral can occur when increased per-product labor costs are passed on to prices, and the resulting higher prices in turn lead to higher wage demands.

Short-term interest rate increases will affect companies financed with short-term debt as they will pay higher interest rates. Companies with margins that are too low may be in trouble as a result. 

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

What does all this mean for my plans?

Don't let the market disrupt your long-term goals. Consistently sticking to your investment strategy with well-diversified portfolios is the key to long-term success. 

Vive's investment strategies take into account the risks that are acceptable for your plan. See in the app how you've set your acceptable risk level for your investment plans. Movements in financial markets are not a reason to adjust your risk. A change in your personal situation can be. If you adjust your acceptable risk level in such a way that your current investment portfolio needs to be adjusted, Vive will automatically take care of that. 

Good to know

Expressions of Vive are compiled to inform and entertain. The content should not be considered financial advice. Wealth management has risks.