Our latest monthly investment update for March 2023 looks at how the global investment markets, economy, and commodities perform.
The FTSE 100 index of leading UK company shares closed at the end of February at 7,876.28 points, up 104.58 points or 1.35% during the month.
European stock markets were in the red at the end of February after a surprise surge in inflation data caused alarm bells to ring.
Hotter European inflation
With the European Central Bank (ECB) looking to hike interest rates again, the positive news of a new trade deal between the UK and the European Union was quickly overshadowed.
France and Spain reported hotter-than-expected consumer price data for February, putting pressure on the ECB to take action that could slow growth in the region.
French consumer prices leapt 6.2% from a year ago, up from 6% in January, while Spain’s equivalent number rose to 6.1% year-on-year, a faster pace than the 5.9% during the 12 months to January.
All eyes are on the ECB’s upcoming meeting in mid-March, with another 50-basis point rate hike widely anticipated. Markets are already factoring in another 75 basis points of moves in the Eurozone before the end of the summer.
Northern Ireland trade deal
Pound Sterling surged briefly against the US dollar and euro after confirming a new post-Brexit deal for Northern Ireland, signalling positive news for cross-border trade.
Sterling jumped 0.95% to 1.255 US dollars and 0.3% to about 1.136 euros. Prime Minister Rishi Sunak called it a “decisive breakthrough” after a meeting with European Commission president Ursula von der Leyen in Windsor.
Although the cost of living crisis persists, consumer confidence has rebounded from historic lows in February, according to GfK’s consumer confidence index. The index rose seven points, but the overall score remains “severely depressed” -38.
All measures, including confidence in the economy and personal finances, showed improvement. The major purchase index, which indicates confidence in buying big-ticket items, increased by three points to -37.
Joe Staton, client strategy director at GfK, said:
Despite widely reported headwinds of inflation continuing to outstrip wage rises, and the ongoing household challenge from the cost of living crisis, consumers have suddenly shown more optimism about the state of their personal finances and the general economic situation, especially for the coming year.
While it’s too early to talk about ‘green shoots of recovery’, the uptick across all measures should be welcomed.
Catherine Mann, an interest-rate setter at the Bank of England (BoE), has called for more rate hikes to address inflation, cautioning that the Bank has been “insufficiently” aggressive in dealing with it.
Speaking to the Resolution Foundation think-tank in London, Mann, who is one of the more hawkish members of the BoE’s Monetary Policy Committee, stated that “a preponderance of turning points is not yet in the data” and that without further rate hikes, high inflation could persist into 2024.
Mann warned that sticky inflation could lead to more UK businesses taking a backwards-looking approach, making it even harder to bring prices down.
Price increases planned
Two-thirds of UK businesses are planning to increase prices due to inflation and higher energy bills, according to a British Chamber of Commerce (BCC) survey of over 1,000 companies.
The survey found that business confidence is at Covid pandemic levels, with only one in three (34%) businesses expecting profit growth in the coming year and 36% expecting a decline. Half of the firms surveyed said they would struggle to pay their energy bills once the business support package ended.
A quarter of companies reported declining sales in Q4 2022, with hospitality firms the least likely to show improvements.
UK overtakes India
The market capitalisation of the UK’s equity market has overtaken India’s for the first time in almost nine months, boosted by a weaker pound and weighed down by jitters in Mumbai led by Adani Group.
Excluding ETFs and ADRs, primary listings in the UK reached a market capitalisation of about $3.11 trillion, surpassing their Indian counterparts by $5.1 billion, according to Bloomberg data. The last time this occurred was on 29th May 2022.
UK firms saw increased activity in February, with the S&P Global/CIPS flash UK purchasing managers’ index rising from 48.5 in January to 53, indicating growth in the sector for the first time in six months.
Growing customer demand and improving business confidence were reported, attributed to lower economic uncertainty, fewer supply shortages, and slowing inflation.
According to the Office for National Statistics, boosted by the highest ever self-assessment income tax receipts for January, the UK government achieved a surplus of £5.4bn.
However, this figure is lower than the £12bn recorded in January 2022, typically a month that delivers a large surplus for the Treasury due to income tax payments being due.
According to Nationwide, UK house prices fell by 1.1% year-on-year in February, marking the first annual drop since November 2012.
Prices also fell by 0.5% on a monthly basis from January, attributed to higher mortgage rates and living costs that made homes less affordable.
Chief economist Robert Gardner stated that economic headwinds were expected to remain strong, making it difficult for the market to regain momentum in the near term, while mortgage rates remained high.
House prices have fallen monthly for six consecutive months due to higher borrowing costs.
According to Citizens Advice, energy firms will send out warning letters in the coming days regarding price increases from April, as they must give reasonable notice of any changes that will affect customers negatively.
The typical household energy bill is set to rise to £3,000 per year next month. The government is reviewing the level of support given to households amid warnings that more may face difficulties.
The current £2,500 limit on household bills and households receive a £400 winter discount, scaled back from April.
On 1st March, £1 buys $1.2073 or €1.1341. Gold is $1,905.20 an ounce, and UK natural gas futures are 119.31p/therm, down from 145.09p/therm a month earlier. The UK 10-year gilt yield is 3.857%, up from 3.304% a month earlier.