Throughout the past year, we have taken a more cautious approach centred around the view that global central bank tightening would eventually deliver a recession. This recession has yet to appear; in fact 2023 has delivered an acceleration in economic growth.
Stocks and bonds had a wild ride over the month. Initial expectations of even higher interest rates were promptly quelled by the deposit run on Silicon Valley Bank, as rapid rate rises revealed fragilities in US regional banks. This sent broad share markets lower and bond prices sharply higher, as investors now expect that central banks will have to cut interest rates by the end of the year. As it became clear that regulator actions had prevented a broader bank run, stocks recovered strongly with global shares finishing the month higher than where they started.

Milford’s Funds had a modestly negative month. Our Australian Funds delivered a strong performance, partly due to the performance of Neuren Pharmaceuticals that surged after its key drug was approved by the US regulator. For our Diversified Funds, wild swings in shares and bonds saw us underperform underlying assets. Our exposure to financials suffered and we maintain limited exposure to large US technology companies that did well last month.

Share markets are falling victim to a bit of cakeism. Shares (notably large technology companies) are rallying on expectations of lower interest rates. But lower interest rates are necessitated by an economic downturn that would be detrimental to broad earnings. Furthermore, investors appear to perceive that any issues in US banks are contained to the banking sector. However, stresses in banks will directly impact the economy via an increasing reluctance to lend. So, whilst the global economy has proved incredibly resilient to date, incrementally tighter lending standards represent another headwind going forward, increasing the risk of economic weakness in the quarters ahead.

The outlook continues to evolve, and a wide range of outcomes is possible. We remain cautiously positioned, but optimistic that we can continue to deliver good outcomes going forward.

*Cakeism – the wish to have or do two good things at the same time when this is impossible. This word comes from the phrase “to have your cake and eat it too”.