Q1 2023

Markets were overall positive in Q1 with equities returning mid-single digits and credit spreads more or less flat (investment grade 7bps wider and high yield 17bps tighter), allowing investors to benefit from the carry. This is quite remarkable given Q1 also saw two bank failures in the US following a run on deposits, the collapse of one of the largest banks in Europe, and volatility in fixed income markets reach levels not seen since the Global Financial Crisis.

The growing belief in the chances of a soft landing in developed markets economies as inflation reports showed some element of moderation amid stable if unspectatular growth switched in mid-February as inflation and growth data both picked up and markets began pricing more aggressive rates hikes in the US.

This abruptly changed in March as Silicon Valley Bank (SVB) failed in a matter of days, followed by Signature Bank and then not long after by Credit Suisse in Europe. This stress in the banking sector threatened to escalate and destabilise the overall economic environment, though at least in the short-term this has been avoided through action by regulator to guarantee deposits or orchestrate a take-over.

The issues in the banking sector, which was not a focus of many given the new regulations brought in following the financial crisis, is another piece of evidence of impact of unwinding excessive risk taken during a decade of effectively free money following the fraud at FTX and volatility in the UK pension system last year.

Whilst the short-term impact of the mini-banking crisis may have been contained, there is the potential for longer-term impacts through the reduction in the provision of credit from the US regional banking sector, and the effect this could have in the broader economy. The greatest focus is currently on Commercial Real Estate, which has nearer term maturities than corporate debt, is fundamentally impacted from the decline in office occupancy levels since Covid-19 and where regional banks had a large market share.