Investment Comment
31st March 2023
Quieter times
Three weeks after the collapse of US banks (Silicon Valley and Signature) and two weeks after the forced merger of UBS and Credit Suisse, the past week has appeared to be calm. However, beneath the surface there is a lot going on.
Before the events of March, investors had started to believe that a US recession could be avoided, and that Europe was weathering the impact of the energy price shock with remarkable resilience. China, proving that idiosyncratic risk is not always negative, lifted its Covid restrictions, raising the potential that a strong rebound in household spending would lift Chinese output this year and contribute to additional global growth in the coming quarters. Optimism reigned albeit with an element of caution as Central Banks continued to raise interest rates as inflation appeared to be remaining higher for longer.
And then along came the banking shock. Banks collapsing and forced mergers triggered memories of the 2008-09 Financial Crisis. Despite the swift and decisive response by authorities, we wait to see how the events of the past few weeks impact lending and the wider economy. It does appear that the risks of contagion have been dampened for now.
US: signs of recovery and recession
The US housing market is often regarded as a leading indicator of the US economy. Higher interest rates resulted in a sharp slowdown in housing activity in 2022. Historically this has been a harbinger of recession, prompting us to become more defensive in our portfolios. In the past few months, there have been signs of a revival in housing activity with a pick-up in mortgage applications and houses bought and sold despite prices starting to fall.
Early signs of a trough in US housing market activity
Source: Artorius, Bloomberg
US consumers loan delinquency appear to be picking up
Source: Artorius, Resolution Foundation
While there are signs of life in the housing market, consumer stress is rising and borrower-level delinquency rates now approach or surpass pre-COVID norms. Understandably many look to the historical culprit: the labour market. However, employment and income gaps are not likely triggers for this recent trend. Despite a tight labour market leading to robust wage growth, some consumers are starting to fall behind on their loans; there were 18.3 million borrowers behind on a credit card at the end of 2022 compared to 15.8 million at the end of 2019. Instead, the evidence suggests that higher prices and higher interest rates are the more likely culprits driving delinquencies.
China changes
“Russia is a Riddle, Wrapped in a Mystery, Inside an Enigma”, Winston Churchill may have been speaking about Russia but the same may be said about China. The clampdown on domestic technology giants, Alibaba and Tencent in 2020-21 prompted a prolonged bear market exacerbating the equity market impact of Covid. When the government stopped the flotation of Ant group, then partly owned by Alibaba in November 2020, the chill of autocratic government impacted investor appetite. However, over the past week we may be seeing a significant thawing in the government approach.
Alibaba has announced (with government approval or instruction?) a breakup of its £220 billion company into six companies. Each company will have the freedom to seek its own external finance. By splitting the company, the government may be creating a solution in which the too-big to fail (or regulate) technology giants are split into less powerful units (and so less threatening to the state and communist party) whilst also enabling growth. The surprise announcement has been taken well by investors with a sharp rise in Chinese technology share prices and may lay the path to future technology giant breakups.
Gerard Lane
Chief Investment Officer
All expressions of opinion reflect the judgment of Artorius at 31st March 2023 and are subject to change, without notice. Information has been obtained from sources considered reliable, but we do not guarantee that the foregoing report is accurate or complete; we do not accept any liability for any errors or omissions, nor for any actions taken based on its content. The value of an investment and the income from it could go down as well as up. The return at the end of the investment period is not guaranteed and you may get back less than you originally invested. Past performance is not a reliable indicator of future results. Nothing in this document is intended to be, or should be construed as, regulated advice. Artorius provides this document in good faith and for information purposes only. Reliance should not be placed on the information contained within this document when taking individual investments or strategic decisions. Artorius Wealth Management Limited is authorised and regulated by the Financial Conduct Authority. Artorius is a trading name of Artorius Wealth Management Limited.
FP2230331001 EXP 12/05/2023