Market Pulse - The week in review

THIS WEEK’S RECAP:

 

▪ Markets experienced a relatively more stable week as both stocks and bonds returned to a state of calm. The apprehension about further banking upheaval diminished, contributing to an improved sentiment. This positive shift was further aided by a much-needed quiet week in terms of economic data.

 

▪ An important development in China was the announcement by Alibaba of its intention to explore splitting into six components, which would become separate listed entities. The news was received positively by markets; the conglomerate’s valuation in markets has collapsed over the last two years and while synergies will be reduced, the IPO of the individual components is likely going to result in a higher value for the sum of the parts. The reality is that the most important piece of information here is hidden; given how much China has applied regulatory pressure on its tech sector over the recent past, this announcement has surely been approved at very high levels in the Chinese government and represents a drastic change of tone from the authorities. While the news was about Alibaba, we believe it sends a broader, very positive message for Chinese equities.

 

▪ We are ending the first quarter of 2023 and while it was an eventful one with the tensions on the banking front and the tug-of-war between signs of an economic slowdown and a resilient job market, it will end up as a very good one for most asset classes. Bond yields are down significantly, and global equity markets are posting decent gains. We don’t see a contradiction here; a substantial part of the stock indices rally (especially in the US) was led by mega-cap tech companies, which are especially sensitive to interest rates. We believe this interconnectivity between different asset classes and the policymaker’s decisions will continue to dictate the path from here.

 

▪ One area that we monitor closely is commercial real estate, particularly office buildings. The struggling sector, which has been hit by the pandemic-induced work-from-home trend, relies heavily on regional banks as lenders. With vacancy rates continuing to rise, borrowing costs have surged due to higher interest rates, putting operating margins under pressure. Moreover, around 15% of commercial real estate loans come up for renewal each year, and the current lower valuations could leave borrowers with a shortfall.

 

 

ON DECK FOR NEXT WEEK:

 

▪ With reduced market action expected coming into the Easter weekend, we will get important updates on the health of both Canadian and US labour markets on Thursday and Friday, respectively.

 

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