The year started with a rally in equities and bonds as markets reacted positively to the prospect of easier monetary policy, however markets were soon weighed down by strong economic data and sticky core inflation forced investors to reassess their interest rate expectations and price in higher-for-longer interest rates. The collapse of Silicon Valley Bank (SVB) in March, the second largest banking failure in US history, and broader concerns around the financial sector including subsequent issues for Credit Suisse in Europe led to a major sell off in the US and European financial sectors. This impacted value stocks in sectors such as banking and energy more broadly while the fall in bond yields was positive for growth stocks and government bonds. The issues in the banking sector seem to be isolated and were dealt with decisively by authorities.

The first quarter of 2023 saw an improvement in growth and business sentiment supported by lower energy and oil prices as well as the reopening of China. Developed market equities performed well over the quarter as a result. With global growth proving more resilient than expected and core inflation remaining stubbornly high, developed market central banks continued to tighten monetary policy in March. The geopolitical backdrop remains challenging however with no resolution to the war in Ukraine and continued tensions between the US and China.

The US economy maintained growth in the first quarter. The labour market remains resilient and wage pressures are gradually decelerating. Headline inflation in the US continued to fall from its peak in June reflecting the slowdown in rental increases and increased house price pressure which have filtered through. Given the cooler inflation data and the turmoil surrounding SVB, the US Federal Reserve Bank raised interest rates by only 0.25% in March to a target range of 4.75% to 5.00%. The S&P 500 Index performed well in March helped by strong returns from growth stocks for example the technology sector, where there is sensitivity to interest rates. US government bonds (treasuries) were also in positive territory as a result of falling yields as their safe haven qualities appealed to investors.

The UK economy has also fared better than expected so far this year and consumer confidence has surprised to the upside. Both headline and core CPI figures increased year-on-year in February which was above expectations. The Bank of England (BOE) increased interest rates by 0.25% in March to 4.25% and while further tightening may be necessary to bring inflation down, the peak may be nearer than had been anticipated as the impact of higher rates on the banking sector is taken into account.  UK equities underperformed overseas equities during the quarter as influential value sectors were weaker but still delivered positive returns along with UK government bonds (gilts).

In Europe, economic activity has also been more resilient, notably in the two main economic engines of the Euro-area, Germany and France, supported by falling energy prices and the resilience of services activity. Despite rising interest rates and the turmoil in the banking sector in March, European stocks were the best performing equity market over the quarter and European government bonds achieved positive returns. Although headline CPI continued to decrease, core inflation increased over the same period and the European Central Bank increased interest rates by 0.50% in March, now expecting higher growth and lower inflation this year.

China’s economy continues to be supported by its COVID reopening, led by the domestic service sectors. Inflation has remained surprisingly low which has allowed easy monetary policy to be adopted. The People’s Bank of China cut to its reserve requirement ratio for banks by 0.25% in March and credit growth has also contributed to the economic momentum. Emerging market equities achieved a positive return overall in the first quarter.

The recent events in the banking sector have created uncertainties over the extent to which the turmoil may affect sentiment and activity, although this seems to have calmed. The outlook for growth, and hence corporate earnings, has deteriorated as a result, however tighter lending conditions may lead inflation to fall faster meaning that the US, UK and European central banks may need to do less to bring about the desired reduction in inflation. Whilst this may result in slower growth in developed economies and possibly a moderate recession, banks are better capitalised now therefore a repeat of the 2008 global financial crisis is unlikely.


Market Performance 2023 Year to Date
FTSE All-Share +3.08%
FTSE World ex-UK +4.86%
FTSE Actuaries UK Conventional Gilts All Stocks +2.05%
FTSE Actuaries UK Index-Linked All Stocks +4.30%


Total returns in GBP to 31/03/2023



Key Rates  
Bank of England Base Rate 4.25%
Inflation (Retail Price Index/Consumer Price Index)* 13.80%/10.40%


*February 2023

Source of data: FE Analytics,,

The content contained in this article represents the opinions of MacIntosh & James Partners Ltd. The commentary in no way constitutes a solicitation of investment advice and should not be relied upon in making investment decisions. Past performance is not a reliable indicator of future results. The value of your investments can fall as well as rise and are not guaranteed.