March had a number of negative surprises in store for investors, but the major stock markets turned upwards again at the end of the month. The value of the MSCI World index increased by 0.6% measured in euros, and the Eurostoxx50 index, which tracks large European companies, ended the month with a 2% increase. In the second half of the month, the North American stock markets also recovered what was lost in the first weeks of the month and gained a little, but still remained in the red by 0.2% in euros.
Central banks showed determination
On 9 March, the US financial regulator seized Silicon Valley Bank, the country’s 16th largest bank. A week later, Signature Bank and First Republic Bank were also forced to close their doors. The second- and third-largest bank failures in US financial history had occurred within a very short period of time. After a few more days, the Swiss National Bank decided that 167-year-old Credit Suisse’s days were numbered and that it would be merged with local Swiss rival UBS.
Both the US and Swiss financial regulators acted very swiftly and decisively, and were able to prevent major panic. Some of their decisions may have been questionable, but specific problems were resolved so quickly that, in today’s world – where investors’ time horizons have shortened significantly, these bank failures already seem like the distant past and have almost been forgotten by many already.
Addressing the concerns of the banking sector was not the only area where central banks behaved exceptionally independently and decisively in March: both the European Central Bank and the US Federal Reserve also showed a strong monetary policy backbone. Although rapid consecutive interest rate hikes threaten economic growth in the coming quarters, central banks are more concerned about the bigger picture and longer-term trends. The major central banks have made it clear that they will not compromise in the fight against inflation, even if it leads to slower economic growth and higher unemployment in the short term.
The European Central Bank raised short-term interest rates by 0.5 and the US Federal Reserve by 0.25 percentage points in March. Both monetary policy coordinators thereby signalled that they would raise interest rates until the pace of inflation was brought under control.
The time horizon of the markets has become shorter and the attitude more superficial
Equity and bond markets are increasingly reflecting investors’ beliefs that the cycle of rising interest rates will soon peak and even reverse at the end of the year. It is believed that if economic growth should turn into a decline, inflation will slow down by itself and monetary policy will not be tightened much more.
I suspect that the increasingly shorter investment horizon may prevent longer trends from being noticed. A lot of people seem to believe that the rising interest rates are a temporary anomaly and that the situation in the financial markets will soon normalise, with the price of money falling again to near zero.
The interest rates of the US dollar have been in decline for 42 years. Several generations of investors have thus grown up in an environment where interest rates fluctuated across economic cycles, but still remained in a long-term downward trend. However, before the decline in dollar interest rates began in 1981, the price of money had been in an upward trend for 35 years. In 1981, ten-year US government bonds offered a 16% yield, while the CPI was lower than it is today: just 5%.
Even very long-term trends (population dynamics and globalisation) reverse or may one day reverse. These turning points will be evident only when the new trend has lasted for some time and society is already looking in a new direction but, during the turning point, society will still hope that the situation will normalise and thereby clings to yesterday. Life goes on, but currents of different directions can cause a lot of turbulence during turning points.
Capital protection and preservation is important in turbulent times
No one can predict the future exactly. Therefore, it is wise to play through various future scenarios, avoid excessive risks, and maintain flexibility in order to be ready to seize new opportunities as they open up.
When managing LHV pension funds, we have been very selective in the bond markets for some time now, and avoided longer-term bonds. We seize opportunities only if we can earn sufficiently attractive returns with reasonable risks. The growing stress in world banking provided an opportunity for this in March.
The assets of LHV pension funds are well diversified between different asset classes. Real estate, precious metals investments, and private capital investments are important components of the pension fund portfolios in addition to shares and bonds. We see investments in gold primarily as insurance against unforeseen negative shocks. For other investments, we prioritise the stability of the cash flow they provide.
March had a number of negative surprises in store for investors, but the major stock markets turned upwards again at the end of the month. The value of the MSCI World index increased by 0.6% measured in euros, and the Eurostoxx50 index, which tracks large European companies, ended the month with a 2% increase. In the second half of the month, the North American stock markets also recovered what was lost in the first weeks of the month and gained a little, but still remained in the red by 0.2% in euros.
