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A Roller Coaster First Quarter of 2023

This article is for informational purposes only – please read our Terms and Conditions.

Our model and portfolio returns during the first quarter came in below the corresponding ARC indices for the first time in several years. Despite this, they remain healthily above the index returns since the launch of Martello in July 2019, and we remain confident that our investment process will recapture this out-performance through the remainder of the year.

The under-performance stemmed from a sharp change in risk sentiment in early March, linked to the banking crisis in the US and the collapse of confidence in Credit Suisse, leading to sharp intervention from central banks to restore trust in the liquidity position of those banks affected.

Our relative performance leading up to this was actually very strong, but the sudden change of risk appetite, over a period of 2-3 weeks, led to significant rotation from value and cyclically sensitive areas of the market, towards safe havens in the shape of government bonds, money market funds and more defensive equity sectors such as staples and long-duration growth stocks in tech and communication services. The developing trend of better non-US equity market performance, which we have seen since October 2022 and have increased exposure to in recent quarters, also reversed suddenly.

Whilst we have exposure to many of these sectors in our models, we are underweight to them (on valuation and longer-term macro grounds) and sectors such as energy, financials and industrials lagged the market significantly whilst central banks rushed to restore confidence.

Towards the end of March, we actually saw the first signs that these efforts were succeeding, with a further recovery in many of our stocks which as I write, is extending into the early stages of Q2, with energy stocks in particular boosted by the OPEC decision to cut oil supply decisively from May onwards. Importantly, the US dollar, which rallied during this period, has resumed its downtrend versus other developed market currencies, a healthy sign as this reflects a positive view on economic conditions outside of the US, where economic data continues to steadily improve.

We made very few changes to our models during March – we did sell the remainder of the US bank ETF we held, the last pure-play exposure in portfolios to this area and added to government bonds within fixed interest. Earlier in the month we decided to trim Hyatt Hotels which at the time of sale had risen 35% for the year on the back of a positive reaction to the lifting of Covid restrictions in China.


The recent banking crisis has significantly influenced the market’s view on where interest rates (particularly in the US) will be in 12 months’ time, despite the fact that central banks continued to raise rates during the month as they sought to deal with stubbornly high levels of inflation.

Lower rate expectations, and the possibility of rate cuts before the end of 2023, appear to be a reaction to increased negativity about the economy, which is not surprising given the investment scars brought on by the last US bank failure in 2008. Some measures of risk appetite and financial stability have actually fallen below levels witnessed during the Global Financial Crisis.

On the face of it, this implies that inflation is coming under control ahead of schedule, creating space for the Fed and other central banks to ease earlier as well. However, the current inflation data doesn’t support that – the trimmed mean measure of inflation in the US has slowed slightly, but is still too far above target to justify a change in policy. Goods inflation has slowed meaningfully but the cost of services continues to climb – reflecting a strong and tight labour market in the US and the demand for services in Europe and China growing at a brisk pace.

Unless global growth (and I emphasize global and not just US growth) slows rapidly during the coming quarters, it seems difficult to reconcile the market’s outlook for rates with the economic data  being reported. This suggests that it is more likely that the Fed chooses to pause and monitor the impact of the past 12 months of rate increases, coupled with the tightening of monetary conditions brought on by the banking crisis. Europe and the UK probably have some way to go yet before they reach peak rates, which is being reflected in the currency markets as well.

Our focus now turns to the next period of corporate results as earnings and their future outlook is key to our process. Corporate profits have been very resilient, in the US and Europe, over recent quarters, surprisingly so in some cases. However, we believe that the US forward price-to-earnings ratio is still too expensive relative to non-US markets, and is most at risk to earnings disappointments, especially considering that return on equity is close to an all-time peak.

This is reflected in the below chart, and has influenced our decision to steadily reduce exposure to the US market, and increase it to Europe, the UK and markets such as Switzerland and the Nordics since mid-2022. 

Both China and the euro region are rebounding after being relatively weak during 2022. In China’s case it was mainly a matter of reopening. In the euro area’s case, it was the unwinding of sky high energy prices and the fears about future energy supplies that have now allowed the economy to regain its feet, particularly the service sector. European markets are also skewed towards exporters and industrials, and are sensitive to emerging market demand for their goods and services, which is also recovering strongly.

Overall, we remain constructive on global economic prospects for the next 6-12 months, and do not expect much fallout from last month’s banking problems. The recent easing in bond yields and rate expectations, if they persist, will provide support to the global economic expansion and further solidify the floor under DM inflation, which is likely to stay above target for some time.

Barring further banking woes, we expect risk asset markets to regain momentum; the risk-on phase will likely resume, but country and stock selection will be key to capturing the returns on offer.

Performance details of our Direct Strategies and the latest factsheet for the Martello Global Equity Fund can be found clicking on the links.

Please contact either myself or Lerato Lebitsa if you would like further information on our portfolio strategies or the Martello Global Equity fund.