1. Market review

Despite the sudden calamity in the banking sector, investors quickly recovered their poise in the first quarter with European equities and major technology stocks enjoying the big gains. Meanwhile, although central banks in the US, UK, Europe and Switzerland all continued to raise interest rates, expectations that the current interest-rate hiking cycle is coming to an end helped bond markets to also deliver solid returns.

We were cautiously optimistic coming into the year and our investors were rewarded for this. Returns from equity markets were in solid single digits with Europe delivering north of 9%. This was broadly in line with our expectations. What was more unexpected, but very welcome, was that bond markets also delivered low single-digit returns. This is because inflation has remained consistently higher than expected - not an environment in which bonds usually do well.

2. Reasons to be cautious

We think this economic cycle has reached the end of its growth phase and that a shallow recession lies in wait for later in 2023. Although we are tempering our enthusiasm for riskier assets slightly, and reducing risk in the portfolios here and there, our caution is also tempered.

Looking forward, we suspect that the coming economic recession will not ne as severe as originally predicted, and while we'll all feel a little more worse off, it won't feel anything like the recessions of the past. Another reason for caution is that corporate profits are also close to their peak for this economic cycle. This usually means that equity allocations begin to struggle but that bond returns pick-up because they're a bit more defensive.

3. Reasons to be optimistic

Although inflation has proved stickier than expected, there may only be one or two interest-rate rises to come out of the US and the UK, however, it remains to be seen whether central banks have done enough to stem inflation. This is because central bankers are always playing catch up, namely enacting policy today in reaction to events that happened last year.

Our reading of the situation is that central banks have probably done the heavy lifting now and that financial markets remain intact. We're still optimistic that corporate profits will remail relatively high, supported by high levels of employment. Economic growth will probably slow, rather than grinding to a halt, while the promise of interest-rate cuts as we approach 2024 will likely see markets flourish once more.

"...it was good to see both sides of our portfolios: equities, which provide the growth element, and bonds which provide the defensive element, doing well against a turbulent backdrop." - Marcus Brookes, Chief Investment Officer.

Top three things to remember in today's investment landscape

1. Always speak to your financial adviser first if you're unsure about how best to approach investing at the moment. They'll be able to provide you with their expertise before you make a decision.
2. Market volatility is front of mind because of considerable news coverage. This can make the risks feel more significant. A diversified portfolio can manage some of these risks and provide real opportunities for growth.
3. Keep your personal financial plan and investing goals at the front of your mind. Now is a good time to focus on the long-term, and use you investments to help mitigate the effects of inflation.

Important information

Past performance is not a guide to future performance and may not be repeated. Investment involves risk. The value of investments and the income from them may go down as well as up and investors may not get back any of the amount originally invested. Because of this, an investor is not certain to make a profit on an investment and may lose money. Exchange rate changes may cause the value of overseas investments to rise or fall.

This communication is issued by Quilter Investors Limited ("Quilter Investors"), Senator House, 85 Queen Victoria Street, London, United Kingdom, EC4V 4AB. Quilter investors is registered in England and Wales (number: 04227837) and is authorised and regulated by the Financial Conduct Authority (FRN: 208543).

This communication is for information purposes only. Quilter Investors uses all reasonable skill and care in compiling the information in this communication and in ensuring its accuracy, but no assurances or warranties are given. You should not rely on the information in the communication in making investment decisions. Nothing in this communication constitutes advice or personal recommendation.

Any opinions expressed in this document are subject to change without notice and may differ or be contrary to opinions expressed by other business areas or companies within the same group as Quilter Investors as a result of using different assumptions and criteria.

Data from third parties ("Third-Party Data") may be included in this communication and those third parties do not accept any liability fir errors and omissions. Therefore, you should make sure you understand certain important information, which can be found at www.quilter.com/third-party-date/. Where this communication contains Third-Party Data, Quilter Investors, cannot guarantee the accuracy, reliability or completeness of such Third-Party Data and accepts no responsibility or liability whatsoever in respects of such Third-Party Data.

Quilter Investors is not licensed or regulated by the Monetary Authority of Singapore ("MAS") in Singapore. This document has not been reviewed by MAS.

QI 26225/28/3398

Published date: May 2023

Review Date May 2024