Market Overview

Summary of world markets in March

The war in the Middle East dominated proceedings and all major asset classes – with the obvious exception of oil – lost ground and suffered high volatility as news from the region came in thick and fast.  Bonds failed to provide their traditional safe-haven role in the wake of a rapid change in interest rate expectations following the dramatic increase in the price of oil and the consequences for inflation. Similarly, the gold price floundered, succumbing to the pressure of higher bond yields, a stronger US dollar and investor liquidations. Equity markets suffered broad-based weakness, with those countries most reliant upon energy imports, particularly certain Asian and emerging market countries, under the most pressure.

Global equity indices declined against the backdrop of war in the Middle East and volatility was high as markets responded to events as they unfolded. A surge in the oil price and the effective closure of the Strait of Hormuz was the focal point for markets, as investors digested the short and longer-term implications for the global economy. The spike in energy prices also led to a swift recalibration of interest rate expectations and this disrupted the disinflation narrative that had previously supported investor sentiment.

Countries seen to be most impacted by energy price rises and supply issues were hit harder and the losses from Asian and emerging market indices were well into double-digit territory. Korea was extremely weak due to its heavy dependence upon energy imports, most of which originate in the Gulf. Related to this, fears of a shortage of helium raised alarm in Korea’s all-important semiconductor industry. India was also an underperformer, adding to an extended period of weakness from this market, as was the Japanese market. The latter was forced to release oil from its strategic reserves, while also facing the headwinds of the weakening yen and rising bond yields. Chinese equities outperformed many of its Asian peers, with the country perceived to have the energy advantage thanks to Beijing’s efforts to shield the economy from oil shocks.  More generally, the strengthening US dollar was also a headwind for emerging markets.

European and UK markets were also battered by the crisis, but to a lesser extent. Precious metals and mining stocks were in the eye of the storm due to falling precious metal prices and profit-taking after the huge gains enjoyed in recent months. The energy and coal sectors were the main sources of positive returns. The German market recorded a monthly loss of over 10%, the steepest decline since March 2020. In the UK, the presence of the oil majors in the blue-chip index was helpful, while mid and small-cap indices underperformed materially.

US equities fell, although fared better than most other global markets. Investor sentiment was already fragile after a swathe of companies were de-rated because of fears about the impact of AI on their business models; in addition, discomfort about private credit rumbled on as more funds were forced to restrict liquidations. News that Meta and Alphabet had been found liable for harming a young user of their platforms also knocked sentiment towards the technology sector. Notwithstanding a more positive end to the month following hopes of a peace settlement, markets entered the Easter break in a fractious mood; at that point, the main index level was well below the all-important 200-day moving average, selling activity had broadened out and the relative strength index was at its most oversold levels since the Liberation Day panic a year ago.

Bond yields rose as investors fretted about the inflationary impacts of the Middle East war. This resulted in markets moving quickly to price in multiple interest rate hikes, a swift about-turn compared to the weeks before war broke out, when two rate cuts were expected from the Bank of England.

The broad UK gilt market delivered a negative total return. While short-dated gilts outperformed their longer counterparts, volatility was high as the market adjusted to the idea that rates may have to be tightened. The 10-year gilt yield reached multi-year highs during the month, rising above 5%. The Bank of England maintained the base rate at 3.75% by a unanimous vote, but the Monetary Policy Committee must now consider the possibility of stagflation, as the pressure from higher energy prices weighs upon household budgets and raises input costs for businesses, thereby weakening end demand. This comes at a time when the employment market is already showing signs of weakness, GDP growth is stalling and many businesses are struggling to adjust to a higher operating cost environment.

The Federal Reserve and European Central Bank (ECB) also stood pat at their March meetings. Markets were unsettled by the so-called, “hawkish hold” from the Federal Reserve, with the committee warning of upside inflation risks stemming from the Iran war, while at the same time acknowledging the weakening employment picture. The ECB warned that inflation across the EU bloc could exceed 3% this year, above the 2% official target.

Corporate and high yield bonds lost ground, but outperformed gilts. Higher quality, longer maturity bonds were weaker because of their greater sensitivity to interest rate risk.

The surge in the oil price was the main event. Brent oil prices jumped by more than 60% in March, the largest monthly gain on record. Brent began the year at $16 p/b and ended the quarter at $118, with the price responding to the effective closure of the Strait of Hormuz (which handles around 20% of global oil supply), the reduction of oil production in the region and attacks on energy infrastructure. The IEA described this as the largest disruption in oil market history, prompting the release of emergency oil reserves. The lasting impact of this oil shock depends upon whether this is a temporary price spike, or a taste of things to come.

The gold price lost around a quarter of its value during the March peak to trough decline.  Traditionally a haven at times of geopolitical stress, the combination of higher bond yields, a stronger US dollar, and liquidations following months of bumper returns meant that the commodity price struggled to find a floor. Like other assets, it was highly correlated to the pattern of news flow regarding the war.

The US dollar benefited from safe-haven flows. In performance terms, this provided some relief to UK sterling-based investors with portfolio exposures based in dollars.