March 2023
Recent data suggest that the economy’s strong start to the year was sustained in February, with consumption growth set to accelerate in the first quarter and payroll employment growth robust, while core inflation remained too high for comfort. But the collapse of Silicon Valley Bank on March 10th has further contributed to our view that this strength won’t last. While the immediate crisis in the banking sector appears to be easing, the aftermath will impact the timing of the recovery.
SVB’s deposit base was drawn heavily from the tech sector, with a high proportion of deposits in excess of the $250 thousand threshold guaranteed by the Federal deposit insurance scheme. The core of SVB Financial’s business was the venture capital ecosystem, taking deposits from, and making loans to venture capital-funded companies. On the other side of its balance sheet, a large proportion of assets were held in longer term fixed income securities rather than loans. Problems in the tech sector led to a withdrawal of deposits, forcing SVB to sell securities. Once these assets were moved from SVB’s banking book to its trading book it was forced to mark them to market, thereby realising losses caused by the aggressive rise in interest rates over the past year. (Higher interest rates means lower bond prices.) These losses led to SVB becoming insolvent. U.S. policymakers were forced to introduce a package of emergency measures over the days immediately following the collapse. These developments will result in tighter credit conditions for households and businesses and weigh on economic activity, hiring, and inflation. In March, we maintained our twelve-month forward outlook for the U.S. economy, reflecting our expectation that the U.S. will fall into recession to the third quarter of 2023. Our outlook remains six months of Stagnation, followed by three months of Recession and then three months of Stagnation.
In February 2023, China’s trade surplus increased to an all-time high of USD 116.88 billion. Exports fell by 6.8% year over year while imports dropped at a faster 10.2% amid a slowdown in the global economy and low domestic demand. The trade surplus with the United States narrowed by 30.9% to USD 41.3 billion.1 China’s annual inflation rate fell to 1.0% from 2.1% in the prior month,2 while surveyed the urban unemployment rate edged up to 5.6% in February.3 The Eurozone economy showed no growth in the final quarter of 2022. Amongst the bloc’s largest economies, GDP grew in the Netherlands, Spain, and France, but contracted in Germany and Italy.4 Consumer price inflation in the Euro Area was confirmed at 8.5% year-on-year in February 2023. Amongst the Eurozone’s largest economies, inflation picked up in Germany, France, Spain, and the Netherlands, but slowed in Italy.5
In February, the U.S. recorded trade deficits with China, the EU, Mexico, Vietnam, Japan, and Canada, while surpluses were seen with South and Central America, the U.K., Australia, and Hong Kong.6 The annual inflation rate in the US slowed to 6%,7 while the unemployment rate edged up to 3.6% in February 2023, from a 50-year low of 3.4% in January.8 The Canadian economy stalled from the previous quarter in Q4 of 2022, putting an end to five consecutive quarters of growth.9 In its March meeting, the central bank paused its rate-hike cycle at 4.5%.10 The unemployment rate in Canada held steady at 5% in February of 2023.11 The annual inflation rate fell to 5.2%, the lowest since January last year, from 5.9% in January.12
Concerns over inflation and its impact on rates returned in February. In a reversal of January’s performance, the S&P 500 finished down 2.4%. Smaller caps performed slightly better, with the S&P SmallCap 600 down 1.2%. Concerns about a Fed-induced recession and the health of the U.S. banking sector sparked demand for safe-haven assets, mainly government debt. Canadian equities finished the month with downward momentum. The S&P/TSX Composite fell 2.5% in February. The S&P Europe 350 extended its year-to-date gains in February, with the pan-European bellwether ending 1.7% higher for the month. The U.K. market was the brightest spot, contributing +0.6%, followed by France and Denmark, with 0.4% and 0.2% in turn. The S&P Pan Asia BMI gave up most of January’s gains as it plunged 5.3% in February.
In March, we maintained our asset allocation, including the twenty percent cash position across all models. 2022 provided an example of how diverse sources of demand and supply can provide gold with its uniquely stable portfolio-additive performance as gold produced a marginal gain in 2022.
While SVB was a failure of risk management, it was also a failure of regulation and supervision. Too big to fail became “too small to see” as Dodd Frank regulations on mid-sized banks—including stress testing—were rolled back by Congress and the Fed after 2018. As this has demonstrated, the current economic recovery is unstable, as the synchronized global pressures of demand contraction, supply shock, and weakening expectations prevail. We are currently positioned for a recession in the U.S. in the third quarter. Our approach to portfolio management is nimble, opportunistic, and deliberate in identifying asset classes that are best placed to generate returns in a new world order. Our focus is on protecting portfolios from downside risk, and we believe that our investment process is working to achieve that goal.
Deborah Frame, President and CIO
1 Trading Economics. China Trade. March 7, 2023.
2 Trading Economics. China Inflation. March 9, 2023.
3 Trading Economics. China Unemployment. March 15, 2023.
4 Trading Economics. EU GDP. March 8, 2023.
5 Trading Economics. EU Inflation. March 17, 2023.
6 Trading Economics. U.S. Trade. March 8, 2023.
7 Trading Economics. U.S. Inflation. March 10, 2023.
8 Trading Economics. U.S. Unemployment. March 10, 2023.
9 Trading Economics. Canada GDP. February 28, 2023.
10 Trading Economics. Canada Interest Rates. March 8, 2023.
11 Trading Economics. Canada Unemployment. March 10, 2023.
12 Trading Economics. Canada Inflation. March 20, 2023.
Index return data from Bloomberg and S&P Dow Jones Indices Index Dashboard: U.S., Canada, Europe, Asia, Fixed Income. February 28, 2023. Index performance is based on total returns and expressed in the local currency of the index.
