The rally over the month was led by lagging cyclical sectors, which have been underperforming the market since COVID hit. With the vaccine seen as a magical solution to the return to normal, relevant sectors surged given that production and consumption is expected to be on the rise. The vaccines should also provide a better case for holding the delayed Olympic Games in 2021, which could provide the much-needed boost to the struggling economy.

However, we remain sceptical that the economy will recover to the level that justifies the market rally, as the issues contributing to the weak fundamentals have not dissipated. Moreover, questions remain over the economic benefits holding the Olympic Games, as travel restrictions are not likely to be fully lifted by mid-2021. The vaccines production timeline will likely only meet the world’s population by 2022. With the valuation levels elevated, the upside is relatively limited in the short term, we would still advise against overweighting Japanese equities considering the comparatively larger downside.

The Japanese Yen appreciated 2.49% against the Dollar during the month, largely on the back of lower expectations for Fed tightening ahead, as well as safe haven seeking amidst the global banking volatility. Over the month of March, the Nikkei 225 gained 2.17% (4.51% in US$ terms), while the TOPIX was 0.51% higher (2.81% in US$ terms).

Fundamentals have continued to improve in Japan, services stayed strong, partly due to the complete reopening of the country. Retail sales and industrial production grew more, household confidence is equally strong, possibly due to the gains in wages and a more healthy inflation outlook. Overall, Japanese economic fundamentals stay sound amidst the global uncertainty, the easing of global energy prices also helped release the pressure on domestic consumption, we are positive on the economy outlook as the lagged boost from reopening should take place in the coming few months. 

Apart from the relatively healthy fundamentals, the 114 trillion Yen fiscal budget will likely provide support to the economy and households; whereas the new BOJ President Kazuo Ueda highlighted that the Bank is more concerned about inflation undershooting the target in the long term, the loose policy should continue to provide some support to the current equity valuations. That said, while the outlook on the Japanese market is relatively positive compared to the global average, considering the current price levels, we would remain conservative and revisit after a more significant correction is observed.

Markets worries over further rate hikes dissipated over the month as the banking sector turmoil continued to develop over the month, funds also flowed into fixed income market seeking safety. Over the month of March Bloomberg Global Aggregate, US Investment Grades, US High Yields, and Emerging Markets US Dollar Bonds gained 3.16%, 2.78%, 1.07%, and 1.24% respectively.

Although global inflationary stays elevated, market expects less rate hikes ahead, largely due to the chain of events nearly resulting in a financial crisis. To avoid contagion, central banks have been releasing extra liquidity to markets, just as banks tighten their credit facilities in response to the crisis. Overall financing conditions are expected to be tightening, and the fear impacting the sentiment and confidence would have a deflationary effect, inflation expectations are lower, further rate hikes might be limited from this point onwards, supporting bond prices as yields go lower.

Given the uncertainty in outlook on the global economy, rates, and inflation, alongside the higher geopolitical tensions, fixed income remains our preferred asset class. We are relatively neutral on duration, while overweighing credit quality. IGs benefit from the slowdown and recession fears, as well as the volatility in the market. Central Banks being close to the end of the rate hike cycle also offers more downside protection for the bonds. On the other hand, high yields are more affected by the economic conditions, and bond prices fall more in when spreads widen. All in all, we are bullish on investment grade bonds, while conservative on high yields.

Although global economy turns out to be more resilient, global risk capital turned more risk adverse due to the uncertainty from the global banking volatility. The US dollar however also weakened due to the uncertainty, which lifted EM equity performance in US$ terms. Over the month of March, the MSCI EM index posted a 2.73% gain.

Global economic slowdown continued, but avoiding recession appears to be a possibility. Without the complete threat from recession, non-export reliant EM economies could have performed better, but the stronger economy and demand would also allow monetary policy to go tighter. On the bright side of things, EM economies are remaining robust, and inflation has somewhat plateaued. A number of EM central banks including India and Brazil have stopped hiking rates, the pause in monetary tightening could help limit the pressure onto the physical economy and investment markets. 

From a fundamental side however, macro headwinds that we have noted since months ago has not materially changed. The global economy is still poised to slowdown, which will hamper most EM economies. Large fiscal stimulus are not possible for most EM governments due to the higher debt servicing costs and risks of reigniting inflation. Risk adverse sentiment due to the banking crisis results in more capital outflows from EM to safe havens, also inevitably putting pressure onto EM equity upside. We remain conservative on EM equities in the short term, and will only consider allocation to insulated EM Asian markets when there is some correction.

The failure of Credit Suisse rocked investment confidence, pressuring equity returns for the month. On the other hand, the ECB is still expected to advance their monetary tightening agenda, driving the Euro 2.49% higher against the Dollar in March. In the month of March, the STOXX 600 index lost 0.71% (1.75% higher in US$ terms).

The economic situation in Europe remains mixed, weakness in manufacturing was balanced out by the robust services demand. Sentiment was weaker, but hiring activity remains strong, inflationary pressures remain elevated. Confidence in the banking system was also hit, as Credit Suisse ended up taken over by rival bank UBS to avoid a systemic event. Overall, the economy outlook is still full of uncertainties, while the fundamentals have been better than originally expected, further growth and upside for the economy is likely relatively limited in the short term, and the further risks arising from financial events are not to be overlooked. 

Henceforth, our view on the European market is largely unchanged, we are still conservative on the equity market, and would prefer fixed income at the current price levels. Although the market had slightly corrected in March, we expect the equity upside in the short term to be limited. The sticky core inflation will also force the central bank to tighten monetary policy further, which ECB had already made clear its intention of continuing, pressuring the equity market and the physical economy further. Before the core uncertainties and headwinds ease, we would not recommend overweighting European equities in the short term.

While the headline data on the economy were relatively positive, Hong Kong and China markets had a mixed month. Market sentiment was further hit by the geopolitical tensions, and the recovery from the exit of ‘COVID Zero’ was milder than expected. Over the month of March, the CSI 300 index fell 0.46% (rose 0.51% in US$ terms), while the Hang Seng Index was 3.10% higher (3.10% in US$ terms).

Three months after China’s exit from its stringent COVID policy, although the worst is behind us, the economic recovery remained sluggish in China. Sentiment seems to have recovered more, as reflected by the positive PMI figures. However, sector data showed limited recovery in the physical economy, sector data across industrial production, housing market, and exports continued to show lacklustre growth. This is also indirectly proven by the borderline deflation reflected by the CPI and PPI data, as weaker demand and excess supply pressures prices lower.

As Chinese growth is facing problems both internally and externally, equity market upside could be capped in the short term. Apart from the weaker economic recovery, geopolitical tensions also pose as a headwind to the Chinese equity market. The Sino-US conflict showed no signs of easing, and further worsened after Taiwan President’s visit to the US, concerns over the further decoupling drew funds away from the market. Although we expect the market to further grow in the longer term, downside are higher in the short term after the earlier rebound, we could prefer to take a cautious approach towards the China market and wouldn’t further increase exposure at current valuation levels.

The unexpected financial turmoil took place in early March, after the collapse of SVB. However, market confidence rebuilt after the Fed provided additional support, markets bounced back in the latter half of the month. Over the month of March, the S&P 500, the Dow, and the NASDAQ gained 3.51%, 1.89%, and 6.69% respectively.

The Silicon Valley Bank collapsed in early March, the FDIC swept in to protect the depositors, but confidence was damaged. Economic indicators showed that the banking woes had some impact on the economy, PMIs have missed market expectations. The more important labour market data was mixed, the key nonfarm payrolls missed expectations, jobless claims was volatile but showed no spikes. Inflation also continued to edge lower, but it is still elevated by Fed target standards. Overall, the banking crisis’s actual impact to the economy is relatively under control, but the cracks in the system are visible.

In response to the situation, the Fed have dialled down on their hawkish tone and only hiked rates by 25 bps in March, officials also suggested that the rate hike cycle might be close to its end. Markets were even more dovish, expecting the Fed to cut rates before the end of the year. Although expectations drove valuations higher, but uncertainty remains, we see equity market downside continue to outweigh the upside potential. In the short term, we reiterate our preference for fixed income over equities, and will only reconsider further building equity exposure when the markets experiences further correction, or when the uncertainty recedes.

   ​ ​US

Worries over the banking system crisis continued to ease, markets returned their focus to economic fundamentals and the upcoming earnings season. Weaker than expected data lowered expectations on further rate hikes from the Fed, equities rebounded on Thursday, the 3 major equity indices gained 1.37-1.63% over the past 5 days ending Thursday. According to Fed data, banks further reduced their borrowed liquidity from Fed as liquidity pressures fall, suggesting that the impacts of the SVB collapse might be receding. The Fed published the FOMC meeting minutes for the March meeting, which showed that members expect the US to enter recession later in the year due to the banking crisis, but reiterated that the inflation remains too high and it remains a priority in Fed’s agenda, and would lean towards another rate hike in May. According to interest rate futures, markets are now pricing in around 70% chance for another rate hike in May, and around 2 rate cuts before the end of the year.

As for the economy, the inflation data came in lower than expected, the headline CPI was 5.0% YoY in March, lower than both the expected 5.2% and the 6.0% in February, largely fuelled by the fall in food prices. Core CPI on the other hand remained elevated, mainly driven by the higher rental and shelter costs, the March figure was 5.6% YoY, in line with expectations. The PPI contracted 0.5% MoM in March, translating to 2.7% higher YoY, both lower than expected. The labour market situation remains mixed, initial jobless claims of 239K was higher than expected and the previous figure, but continuing claims was lower than expected. The softer headline CPI and PPI data together with the mixed labour market data raised expectations of less rate hikes ahead. Next week, the US will be releasing the latest Markit PMI data for April, the leading index for March, as well as housing market data, including building permits, housing starts, and mortgage application data for March. The usual labour market data on initial and continuing jobless claims will also be released, while the US Fed will publish the latest Fed Beige Book.

 ​Europe

European equities went higher as market sentiment continue to recover from the earlier banking crisis. Over the past 5 days ending Thursday, the UK, French, and German equity indices were 0.81-2.74% higher. Divergences continued to appear within the ranks of ECB officials, Austrian National Bank Governor Robert Holzmann suggests that a 50 bps hike is still on the table for the May meeting, the sentiment is echoed by Bank of Slovenia Governor Bostjan Vasle, who suggested that a bigger hike could still be needed due to the stickiness of the core inflation. However, Bank of France Governor Francois Villeroy De Galhau argued that the ECB has completed most of the rate hikes needed. Interest rate futures suggest that market expects no more than 3 rate hikes before the end of the year. As for the economy, industrial production in the Eurozone was 2.0% YoY in February, which was better than both market expectations and previous value. Retail sales contracted 3% YoY in February, which was also better than market expected. Next week, both Eurozone and the UK will release the Markit PMIs for April, the UK will release CPI data and retail sales figures for March, while Germany will publish the ZEW survey data for April.

​China

Hong Kong and China equities had a mixed week, index heavyweights Tencent and Alibaba saw steep losses after their key shareholders announced plans to sell their existing holdings. Over the week, the CSI 300 index was 0.76% lower, the Hang Seng Index gained 0.81%, while the Hang Seng Tech Index lost 1.64%. More world leaders arrived at China for a State visit, including Brazil president Lula, trade and economy will likely be the focus at the meeting. As for the economy, Chinese data show conflicting signals, new loans and aggregate financing data show more growth in credit, and export data in March surprisingly grew at 14.8%, quite the opposite of the markt expected 7% contraction. However, inflation data were soft, CPI contracted 0.3% MoM in March, lower than market expected; PPI also contracted 2.5% YoY, suggesting that demand is likely weaker. Next week, China will be publishing their GDP data for Q1 2023, sectorial data on industrial production, retail sales, fixed assets, as well as property sales data for March.