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Private
Clients Market
Perspectives
August 2019
Foreword
Despite US equities hitting an all-time high in July, we will be keeping our end-
year forecast at 3000 for the S&P 500. While there may be an urge to reduce
risk after the strong performance by equities, accommodative central bank
policy looks set to support equity valuations for some time yet.
Indeed, risk assets typically research shows that environmental,
outperform safer ones late in the social and governance issues can
cycle. In the current late-cycle add value to security selection and
environment, equities and emerging improve portfolio performance.
markets debt look set to outperform.
That said, security selection and The gold price has bounced
having active strategies will be key. by close to 11% this year, as
geopolitical tensions intensify and
Major central banks’ increasingly rate-cut expectations grow. Rather
dovish tone has triggered record than looking to make investment
flows into most parts of the bond gains from holding gold, we believe
market, resulting in depressed rates the yellow metal’s key attribute for
and spreads. As we head deeper investors is as a diversification tool.
into the cycle, and with ever higher
levels of leverage, a diversified and “Safe” assets and risk assets have
selective approach to bond investing been positively correlated this year,
is key. as good news is seen as bad by
financial markets. Continuously
At a time when investors are keen improving growth is set to return
to boost income, opportunities in risk assets to the normal state of
emerging markets debt may offer affairs, where good news is seen as
one possible solution. In doing so, good, perhaps later this year.
Jean-Damien Marie
and Andre Portelli,
Co-heads of Private Bank Investments
Market Perspectives August 2019 | 1
Contents
4 When good news is bad news
6 A closer look at late-cycle performance
7 Equities at a tipping point?
8 Time to be selective in fixed income
10 Selecting for alpha in emerging markets debt
12 Golden moment
14 Multi-asset portfolio allocation
Contributors
• Gerald Moser, Chief Market Strategist – gerald.moser@barclays.com
• Julien Lafargue, Head of Equity Strategy – julien.lafargue@barclays.com
• Damian Payiatakis, Head of Impact Investing – damian.payiatakis@barclays.com
• Michel Vernier, CFA, Head of Fixed Income Strategy – michel.vernier.barclays.com
• Henk Potts, Senior Investment Strategist – henk.potts@barclays.com
Market Perspectives August 2019 | 3
Gerald Moser, Chief Market Strategist – gerald.moser@barclays.com
When good news is bad news
The “good news is bad” reaction of equities and bonds to macroeconomic
data has been all too prevalent so far in 2019. So how soon will it be
before risk assets revert to normal and react positively to good news?
Liquidity and growth are two As the economy starts to expand, In the first instance, positive growth is
intertwined factors that are vital central banks can slowly remove perceived positively by risk assets and
to the outlook for the economy liquidity with an eye to extending negatively by “safe” assets (see chart
and prospects for financial assets. the economic cycle for as long as below). This is the common state of
possible. At that stage, it is usually affairs. With strong growth, equities
Traditionally, central banks ease all about mitigating inflation risks react well while safe assets such as
monetary conditions during a and avoiding excesses building up government bonds, gold or the Swiss
recession to provide more liquidity. in the economy. That said, liquidity franc typically underperform. This
This results in cheap credit and may need to be increased at a later regime has prevailed for most of the
easy access to financing for stage of the economic cycle, as is the past couple of years.
households and companies and in case currently.
turn helps the economy to recover. However, since the start of the year,
In a nutshell, liquidity is like a fuel “good news is bad news” has been in
that can be adjusted to control the vogue. In this setup, risk assets and
strength of the growth engine. safe assets are positively correlated.
“Liquidity is like a fuel Whenever economic data starts to
When good news is bad improve or surprise positively, not
that can be adjusted to In financial markets, the relationship only do safe assets underperform
control the strength of between growth, liquidity and assets but growth-sensitive assets, such as
the growth engine.” is not constant. There are usually two equities, underperform as well (see
different regimes: “good news is good chart on opposite page).
news” and “good news is bad news”.
S&P 500 index gains usually associated with rising US bond yields
3100 200
2900
150
2700
100
2500
Basis points
Index point
2300 50
2100
0
1900
-50
1700 S&P 500 (LHS)
3-month change in 2-year US yields (RHS)
1500 -100
2014 2015 2016 2017 2018 2019
Year
Source: Bloomberg
A good news is bad news regime is We need a continuous improvement
typically the situation that happens in growth data for risk assets to
when the growth environment is switch back into the normal “good
weak and markets question the news is good news” regime. This is
strength of the recovery. Market unlikely in the next month or two but
participants would rather see more could happen later in 2019.
liquidity injections to ensure growth
does not fall further rather than
wager on growth recovering by itself.
“We need a continuous
Reverting to normal
With central banks easing, or improvement in growth
indicating that they will do so soon, data for risk assets to switch
the liquidity part of the equation back into the normal ‘good
has been taken care of, at least for
the time being. But fixed income news is good news’ regime.”
markets have priced in more easing
than is likely. This could weigh on
risk assets if only a small rebound in
growth is seen in the three months
to September, as we expect.
S&P 500 reacts positively to negative economic news
14% -35
12%
-30
10%
S&P 500 year on year %
8% -25
6%
-20
Index point
4%
-15
2%
worse economic surprise
0% -10
better economic surprise
-2%
S&P 500 (year on year)
-5
-4% Citi global economic surprise index (RHS, inverted)
-6% -0
Feb-2019 Mar-2019 Apr-2019 May-2019 Jun-2019 Jul-2019
Date
Source: Bloomberg
Market Perspectives August 2019 | 5
Gerald Moser, Chief Market Strategist – gerald.moser@barclays.com
A closer look at late-cycle performance
Risky assets tend to outperform safer ones in a late-cycle environment. As central banks
ease monetary policy further deep into the cycle, will risky assets outperform this time?
When we launched our investment their returns also supports them over asset class. Although the upside
theme “investing in a late cycle” in government bonds or credit. to equity index levels may be more
April, we briefly described the typical muted than in past late-cycle
performance of the main assets Investment grade is actually the least episodes, single-stock selections
during a late-cycle phase. We now likely to deliver a positive return, while and active strategies could provide
take a closer look at the pattern of high yield’s past performance is also investors with double-digit returns.
cross-asset performance seen during lacklustre towards the end of the
that part of the cycle. We then relate cycle. The median performance of With the dovish turn from the US
those past results to our views in the those two asset classes is negative Federal Reserve seen in recent
context of a late cycle. using historical data. Within fixed months, our conviction towards
income, the clear outperformer is EM emerging markets assets remains
Don’t derisk too early debt. Not only does it show historical relatively strong. This also extends
Performance data since the mid positive returns, but is almost as to the fixed income world. Similar to
1970s shows that risky assets tend likely to be positive as it is for equities what has happened previously, we
to outperform safer assets in a or commodities. believe that EM sovereign debt should
late-cycle environment (see chart). fare better than DM sovereign bonds.
The median annual performance of This time is unlikely to be much While EM debt looked less attractive
emerging markets (EM) equities and different: focus on equities and when US yields were above 3.2%
commodities is particularly strong, EM debt last year, levels of around 2% make a
with developed market (DM) equities In the current cycle, we prefer equities compelling case for the asset class for
also performing well. In addition to over fixed income. As central banks investors looking for yields.
the strong performance of the above are pushing rates ever lower, we see
asset classes, the consistency of more relative opportunities in the The one area where it may be different
this time around is for commodities.
In a typical late-cycle environment,
Risky assets more likely to deliver positive returns in a late cycle it is the best performing asset as
demand far outstrips supply. But with
90
the surge in shale oil output seen this
80 decade, US oil production has been
probability of positive returns in late cycle
70 through a rebirth which limits the
60 potential for upside in energy prices.
Percentage (%)
50 That said, gold is one commodity that
40 could be considered for diversification
30
reasons, especially with the cost of
holding it being very low.
20
10
0
e
s
d
s
d
s
s
es
es
ie
er
nd
tie
ad
el
e
ti
iti
ht
ur
yi
nk
ui
ui
gr
bo
od
g
s
h
eq
eq
Li
ei
ea
t
g
m
n
en
w
hi
ig
Tr
EM
DM
m
m
de
re
US
Co
US
st
ve
tra
ve
so
in
D
EM
US
US
Source: Barclays, Refinitiv
Julien Lafargue, Head of Equity Strategy – julien.lafargue@barclays.com
Equities at a tipping point?
Equity valuations appear expensive on several measures and suggest caution. However,
is reducing portfolio risk a good idea when central bank policy is so accommodative?
With US equity markets reaching new In other words, we believe that there is no doubt their effect is positive.
all-time highs in July, many investors sentiment is more likely to shift Indeed, should markets become
consider the current backdrop to be back and forth between recession volatile again, we would expect further
“toppy”. We share some of that feeling fears and goldilocks than it is to stay intervention from central banks.
and do not feel compelled to revisit perfectly still.
our fair value estimate (S&P 500 index Second, our cautiousness is echoed
around 3000 at the end of 2019) Be wary of reducing portfolio risk by many investors who prefer to wait
just yet. But we also caution against Our cautiousness on the outlook for on the sidelines. This idling capital is
the urge to take too many chips off equities suggests reducing risk ahead earning next to zero and represents
the table. of what looks like another – possibly a significant drag on performance.
significant (or more than 10%) Should market sentiment deteriorate
Our cautiousness is a result of what – drawdown. temporarily, long-term investors are
we would consider unreasonable likely to “buy the dip”, supporting
expectations. Indeed, our assessment However, we see two main reasons equity prices and preventing a
is that the market is discounting some why cutting risk aggressively may not large pullback.
sort of perpetual “goldilocks” scenario be a good move. First, going against
whereby growth is neither too central banks has been a losing Our message remains unchanged:
good nor too bad and central banks strategy for years and this is unlikely to stay invested but ensure portfolios
continue to provide ample liquidity. change. While the long lasting impact are exposed to the appropriate level
Although this may happen (it’s of quantitative easing and negative of risk and look for idiosyncratic
arguably been the case for more than interest rates is questionable, from a opportunities (rather than market
10 years now), the market’s perception short-term equity market perspective, beta).
is likely to change.
Looking ahead
As we look towards the remainder of
2019 and the beginning of 2020, we
S&P 500 returns growth driven by multiples gains in 2019 continue to see a backdrop where
both economic and earnings growth
25.0%
should allow equities to gain ground.
The main question revolves around
20.0% 1.5% valuations. Multiples, in particular in
the US, have expanded significantly in
Year-to-date change
the last six months and it is difficult
15.0%
to argue for further expansion (see
chart). As such, returns are likely to be
10.0% 19.5% more muted, at least at the index level.
Change in 12 months
forward earnings
5.0%
Change in 12 months
forward price-to-earnings ratio
0.0%
S&P 500 index
Sources: DataStream, Barclays Private Bank. July 2019
Market Perspectives August 2019 | 7Michel Vernier, CFA, Head of Fixed Income Strategy – michel.vernier.barclays.com
Time to be selective in fixed income
As we head deeper into the cycle and with ever higher levels of leverage,
a diversified and selective approach to bond investing is key.
Central bank monetary policy has Only once inflation starts to retrace induced distress include Argentina,
the power to move markets quickly from current low levels towards the Brazil, Greece, US high yield energy, UK
and sharply. So it is little wonder Fed’s longer term inflation target of retail or the Chinese property market.
that investors pay much attention 2%, will rates trend higher. At least for
to central banks. That said, it is fixed now this seems unlikely. Default risk
income investors that are at the sharp The impact of credit cycles on global
end, being directly affected by policy Buy-and-hold bond investors might growth and capital markets has long
shifts for two reasons. not only focus on central bank “bail been debated by many; including the
outs”, yield and spread, but most renowned economists Hyman Minsky,
First, rate policy, and bond purchasing importantly assess how likely they are Barry Eichengreen or Irving Fisher.
programmes, directly impacts rate- to get their capital back along with
sensitive fixed income portfolios and any promised coupon payments. Economic growth, default rates and
determines how much can be earned the performance of fixed income
for any new bond investment. Dangers of excessive debt assets are all interconnected. Rather
In a period of macroeconomic than opening the debate over the
Second, rate policy indicates how consolidation, the most decisive factor credit cycle, we focus on fixed
confident central banks are about is usually the level of leverage. Debt is income investments.
the outlook for the domestic, and a supporting factor for the economy
global, economy. The less confident as it allocates surplus cash efficiently Previous stressed periods have proved
policymakers are about the outlook, to where it is required to invest in one point for successful buy-and-hold
the more willing they are to provide future growth. Excessive debt, on the investors: being selective is the key
monetary support to the economy. other hand, can lead to inefficiencies to success. As much as most of the
and distress in the economy. distress examples mentioned above
Rush to bonds have led to spill-over effects and
Major central banks are taking a more increased volatility in other markets,
dovish tone, with the Federal Reserve they did not necessarily trigger a
(Fed) leading the way by cutting rates “In a period of macroeconomic global wave of debt defaults. Even
in its July meeting by 25 bps and the 2008 credit crisis did not result
halting its balance sheet reduction consolidation, the most in major defaults for holders of debt
in August. decisive factor is usually in non-financial investment grade
the level of leverage.” corporate companies.
The move was not as dovish as
markets had priced in, with chairman
Jerome Powell denying that this was
the start of an easing cycle and the Not all distress will eventually end up “Previous stressed periods
front end of the curve selling off in a global credit crisis like in 2008.
as a result. The dovish stance and However, at a time of contracting have proved one point for
monetary support from central banks growth, too much leverage can spill successful buy-and-hold
has led to record flows into most over and have negative impacts across investors: being selective
parts of the bond market. sectors and regions. In recent years,
good examples of excessive debt- is the key to success.”According to rating agency Moody’s, Spotting the investment opportunities markets bonds historically performed
the default rate for Baa rates issuers In coming editions of “Market well in a late cycle, in sync with the
did not surpass 1.5%. during the credit Perspectives” we will highlight where commodity cycle and central bank
crisis. To put this into perspective, the leverage has been built up and to accommodation. But as always,
default rate of US high yield issuers what extent it may be a concern for diversification and selection is key in
stood at 2.9% in May. fixed income investors. all areas of the bond market.
Leverage on the rise Our key calls in the fixed income
Since the substantial contraction market are longer term rated
seen in 2008, the level of financial bonds and USD-denominated “We believe
leverage globally has increased: emerging markets bonds. While not
the rise of corporate leverage, without risk, we believe that longer that longer term BBB
developed and emerging market term BBB bonds and US dollar- bonds and US
government leverage, increase in loan denominated emerging markets dollar-denominated
market assets and flood of wealth debt offer a good risk reward in the
management products seen in China current environment. emerging markets
help to demonstrate the point. debt offer a good
BBB long duration bonds offer risk reward in the
At times of distress, not every market significant higher spreads compared
segment should be considered as to sovereigns. Meanwhile, spreads current environment.”
excessive or problematic necessarily. are comparably safer in times of
Bond investors should be conscious of subdued economic growth compared
this and be selective with investments. to speculative grade bonds. Emerging
Market Perspectives August 2019 | 9Damian Payiatakis, Head of Impact Investing – damian.payiatakis@barclays.com
Selecting for alpha in emerging markets debt
Non-financial data can be vital to spotting yield opportunities in emerging
markets corporate debt and improving portfolio performance.
In this late-cycle environment, with Appreciating downside risks in EMD Investors who use non-financial
investors struggling to generate Investors in all corporate bonds are information, which is generally
income, as a house we believe that subject to asymmetrical risk – where split into three categories of
emerging markets debt (EMD) can downside risks of distress or default environmental, social and
offer attractive yield opportunities. tend to be larger than the upside governance (ESG) information, can,
That said, selection is key. produced by returns on committed as we previously explained, better
coupon payments. understand an organisation’s long-
Generating alpha through security term risk and return prospects.
selection can be challenging. Emerging markets have heightened
But in EMD, where higher levels of risks given the greater potential Research supports positive impact of
information inefficiency exist more for political and economic volatility. using ESG data
than in many other asset classes, Flows of capital in and out of this A growing body of academic and
it is tougher still. Investors who asset class are primarily driven by industry evidence suggests that
incorporate non-financial data currency movements and often a incorporating ESG considerations
into their decisions can gain an poor understanding of individual into fixed income portfolios is likely
information advantage to identify market dynamics. to improve returns.
the best risk-reward opportunities
in the asset class. We believe that effective selection of The Quantitative Research team in
EMD securities requires greater insight Barclays Investment Bank conducted
Below we outline why and into individual issuers. Financial data innovative research in October
how inclusion of non-financial from accounting statements provides 2016, and expanded it in October
information in the EMD investment a critical baseline of information. But a 2018, that concluded accounting
process can improve performance more holistic, and informed, approach for ESG characteristics can improve
for investors who make the effort. also includes non-financial information. bond performance. The team
Portfolios of high-ESG issuers have outperformed low-ESG portfolios
in the euro and US dollar IG markets (2009-18)
USD IG market Euro IG market
MSCI MSCI
43 51
high vs low ESG high vs low ESG
Sustainalytics Sustainalytics
27 43
high vs low ESG high vs low ESG
0 10 20 30 40 50 0 10 20 30 40 50
Average basis points per year Average basis points per year
Source: Bloomberg Barclays Bond Indices, MSCI ESG Research, Sustainalytics, Barclays Researchfound that investment grade bond data about governance arrangements, Acknowledging data challenges
portfolios constructed with an ESG such as board dynamics, director Transparency and non-financial
tilt, irrespective of data provider, effectiveness, or family commitment data remain more limited in
outperformed the market. to the company. emerging markets.
Other research1 supports the above Improving ESG data in Specialist ESG data providers cover
findings – that ESG complements emerging markets a limited portion of the universe.
traditional factors in fixed income More recently, additional data about Private companies who dominate
well; and tilts can improve default social and environmental factors is much of the issuance do not have the
risk in portfolios. helping to manage the associated same, or sometimes any, reporting
risks and disparities of operating requirements about their ESG activities.
Notably, most research has focused in emerging markets. Regulation Some investors engage directly with
on the relationship of ESG insight in emerging markets is often less companies to get this insight – and
and developed markets and stringent and social needs are often encourage greater reporting.
investment grade issuers, where higher. This makes controversial
more data is available. However, behaviour by debt issuers a greater But transparency is improving. An
it seems reasonable to infer a risk, and therefore a likely impact for increasing number of companies
similar correlation between ESG in debt holders. are self-reporting as they recognise
EMD investing. the benefit to potential investors.
Although there are a range of ESG Since 2010, 15 key emerging market
Start with governance, extend to risks that could affect an issuer, countries or exchanges have set
social and environmental factors the materiality of these depends out regulations for stewardship
Using non-financial data when upon the sector and the industry. and governance codes2. Having to
assessing fixed income is primarily Disclosure on ESG will help determine publish sustainability reports will
a tool to manage downside risks, the sustainability risks on the offer investors more insights into the
though innovative approaches are business model over the long term. company’s management of these non-
emerging for upside benefits too. financial practices.
For instance, in the mining sector
While governance has generally social issues, such as health and Value of ESG in security selection
been the main focus, evaluation safety practices, employee relations Given the nuances of investing in
of environmental and social risks and community engagement, can emerging markets, incorporating
is increasingly being used in credit materially affect creditworthiness. non-financial data into investment
analysis, given the new, valuable, decision-making can strengthen
insight these factors can provide. Recent disasters in the mining sector identification of future risks and
in Brazil also point to the importance opportunities that could affect an
In emerging markets, issuers of environmental issues. For example, issuers ability to repay debt.
frequently are private companies the collapse of Vale’s Brumadinho
and have complex and opaque dam in January resulted in at least This is especially critical when
ownership practices. Starting by 60 fatalities, with more than 200 investing late in the cycle. Significant
reviewing governance continues to people still missing. While only downturns in markets affect all assets,
be a wise practice to understand accounting for 2% of the company’s but generally disproportionately more
the motivations of the issuer. While output, Moody’s cut their rating to so for EMD and idiosyncratically
complex structures may appear Ba1 (or “junk “rating) from Baa3, between EMD issuers. Investors
unclear, ultimately the aim is to and S&P Global Ratings and Fitch who can look beyond the index, and
confirm that the interests of the both cut Vale to BBB-, their lowest effectively select assets, stand to
issuer are aligned with long-term investment-grade rating. Investors generate attractive yield opportunities
debt holders. This can be achieved who missed this risk have been from this asset class.
with insight from non-financial affected accordingly.
1
From “Sustainable Investing and Bond Returns” in the Journal of Environmental Investing 2017
Fidelity White Paper, July 2018
2
Corporate governance codes in EM – Brazil (2016), Egypt (2016), Malaysia (2014), Pakistan (2013), Poland (2016), Russia (2014), Taiwan (2010), Thailand (2012), The Philippines (2016), Turkey (2014), UAE (2011)
Market Perspectives August 2019 | 11Henk Potts, Senior Investment Strategist – henk.potts@barclays.com
Golden moment
After the rally in the gold price this year in a flight to safe-haven assets, what role can the
yellow metal play in investors’ portfolios?
Falling global growth forecasts, Investors that are apprehensive about Leading purchasers include Russia,
ongoing geopolitical tensions and the economic outlook primarily gain Turkey and Kazakhstan. A range of
aggressive policy easing expectations exposure to gold through exchange factors are proffered for the surge in
have investors queuing up to buy gold. traded funds (ETFs). Gold ETFs are a purchases including “dedollarising
more efficient way to hold gold when reserves”, reducing counterparty risk
Gold attractions compared to buying bars and coins and diversifying holdings.
Recent months have seen the rally in after the costs of buying, storing
the gold price extend. In May, we saw and insuring physical gold is taken
the biggest monthly increase since into account. Flows into gold ETFs
2016, pushing the price of gold up have climbed this year. According to “Central bank purchases
to its highest level since April 2013. Bloomberg data, three million ounces
Currently trading around the $1400 were added in the first half of this [of gold] rose 74% in
an ounce level, gold is up close to year, with the total gold held by ETFs 2018 compared to 2017.”
11% year to date. However, this is still up 4.2%.
significantly below the $1920 all-time
high achieved in September 2011. Central bank gold purchases
Two decades ago, Gordon Brown, Lacklustre jewellery demand
The radical pivot in US interest rate the then British Chancellor of the Rising demand from investors has
expectations seen in recent months Exchequer, decided to sell just over helped to overshadow the relatively
has also had a significant impact half of Britain’s gold reserves. The lacklustre demand for gold used
on the price of gold. A lower policy controversial move was executed at in jewellery. Global gold jewellery
path reduces the opportunity cost of an average price of $275 an ounce. demand only rose 1% in the first
holding a zero interest bearing asset. It is estimated that the decision quarter of 2019 on a year-on-
Lower interest rates can also weaken cost the taxpayer as much as £5bn, year (y/y) basis. The slowdown in
the dollar, so reducing the costs for although it’s hard to quantify the growth and rising trade tensions
non-dollar dominated buyers. exact loss/gain given we don’t know held back Chinese buyers. Political
how the proceeds were invested. and economic disruption in Europe
and currency weakness in Turkey
While the Labour government were and Iran also cut demand. On the
cautious about the precious metal’s positive side, wedding purchases
“In May, we saw the biggest long-term prospects, there are a and lower prices boosted Indian
monthly increase since wide range of governments that are demand (+5% y/y) while the US
still willing to increase their holdings. only registered minimal growth.
2016, pushing the price World Gold Council figures show
of gold up to its highest central bank purchases rose 74%
level since April 2013.” in 2018 compared to 2017. Central
banks added 651 tonnes last year,
which was the most since 1971.“Global gold jewellery Furthermore, demand from the Gold is also seen as a hedge against
dentistry industry, a traditional user inflation. Data suggests gold hasn’t
demand only rose 1% in of gold, has been in structural decline done a great job as a store of value
the first quarter of 2019 on over the past decade as the industry over the past few years. However, over
a year-on-year (y/y) basis.” adopts alternative materials including longer periods of time, such as the
all ceramic crowns. past century, it has been a useful tool.
Supply on the up Most importantly for us, we think
Industrial needs While jewellery and industrial demand that gold should be used as a
Industrial demand is subsidiary to growth has been limited, supply has diversification tool, as demonstrated
the role of jewellery in determining steadily been rising. Mine production through our Discretionary Portfolio
the total demand for gold. With gold rose to record level last year, driven by Management asset allocation model.
being a very efficient conductor, not new projects coming on line and state For the majority of our clients, the
tarnishing and able to be melted down, supported expansion. Rising recycling allocation to gold should be in the low
it is valuable to the electronics industry. has also boosted the supply of gold, single-digit percentage range. Clients
particularly from the distressed trust us to preserve and grow their
Gold is used in a range of devices economies of Iran and Turkey. wealth. Gold can be used to preserve
including smartphones, global portfolios during turbulent times, but
positioning systems and televisions. A diversification tool is unlikely to be the source of growth
While the quantities per device are Investors are attracted to gold for a over prolonged periods of time.
very small, the aggregated volume multitude of different reasons. Rightly
used is still worth monitoring. The or wrongly, gold is seen as a safe-
recent slowdown in hardware sales, haven asset. There’s no fundamental
due to the slower replacement reason why this should be the case, “For the majority of our clients,
cycle, has held back demand growth. but if enough people believe it, it starts
to generate its own truth. the allocation to gold should
be in the low single-digit
percentage range.”
Jewellery accounts for almost half gold demand
1%
2% 2%
6%
Jewellery
Other fabrication
17%
Investment
Industrial fabrication
Official sector
Electronics
Other industrial & decorative
Medals & imitation coins
9%
Dental
45%
3%
15%
Source: Bloomberg
Market Perspectives August 2019 | 13Gerald Moser, Chief Market Strategist – gerald.moser@barclays.com
Multi-asset portfolio allocation
Barclays Private Bank discusses asset allocation views within the context of a multi-asset
class portfolio. Our views elsewhere in the publication are absolute and within the context
of each asset class.
Cash and short duration bonds: lower inflation expectations and maintain low conviction to the asset
neutral dovish monetary policies. Given class as margin pressure typically
• Our preference for higher quality, this backdrop, we anticipate the increases late in the economic cycle.
liquid opportunities translates into asset class to predominantly be
our positioning in short duration a diversifier rather than a major • Following the recent rally in riskier
bonds, which offer an attractive source of returns. assets, high yield bonds look
risk-return trade-off in the context expensive. Spreads are tight by
of an inverted yield curve. • Although US dollar real rates historical standards, which we do
remain at historical low levels, they not view as attractive in the context
• Nonetheless, we maintain a neutral are still too attractive to ignore of the credit and liquidity risk taken
exposure to the asset class as real relative to the other developed and the returns available from other
interest rates remain negative in bond markets. UK and European asset classes.
most jurisdictions. bond markets failed to synchronise
with US rates due to their own Emerging markets bonds: neutral
Fixed Income: neutral geopolitical challenges, and
We see moderate risk-return depressed yields make it difficult • The Fed’s dovish stance and
opportunities in fixed income given to find these markets attractive. stronger local currencies should
the recent spread tightening and late continue to provide some relief
cycle dynamics. Sovereign rates are Investment grade bonds: neutral to the largely dollar-denominated
less attractive in the context of a low emerging markets (EM) debt.
yield environment and that we see the • A still benign macro outlook and
higher-quality segment of corporate easing interest rates should be • Although choppy energy prices
credits as a better alternative, given broadly positive for investment and unresolved trade disputes
their relative safety and better returns. grade bonds. Nevertheless, we provide a headwind to emerging
remain neutral on the asset class markets bonds, credit quality hasn’t
We remain cautious on the riskier amid mounting concerns over the deteriorated and the economic
parts of corporate debt as they don’t rising pile of corporate debt. momentum backdrop remains
entirely compensate investors for the reasonably positive.
level of risk taken at a time when credit • Although spreads have tightened
events may be on the rise. Emerging significantly since the beginning • Spreads have tightened since
markets bonds remain our favourite of this year, we believe investment the beginning of the year as
bet to enhance returns at this stage in grade bonds will continue to earn investor flows reverted back
the cycle due to their yield pick-up. some carry and thus outperform into EM bonds amid improving
low yielding government bonds, sentiment. However, spreads remain
Developed government bonds: specifically in Europe. comparatively wide versus high
neutral yield bonds and offer a better risk-
High yield bonds: low conviction return profile. We favour US dollar
• Developed government bonds emerging markets hard-currency
worldwide have been losing their • While default rates are at bonds due to their relatively
appeal as rates edged down amid historical low levels and corporate attractive valuations.
softening economic growth, fundamentals remain robust, weEquities: positive • We favour active management and Commodities: neutral
Positioning in high-quality, selective stock picking of companies • The sole exposure within
growth companies through active with strong balance sheets, commodities continues to be our
management is our preference given although we are agnostic on the position in gold which we view as
our view that in late cycle, alpha geographical allocation of our equity complementary to the other risk
(actively selecting superior businesses) positions. We focus on businesses mitigating assets in the portfolio,
out-performs beta (passively following with high cash returns on capital, especially in light of the low interest
the market). Although we see more with conservative capital structures rate environment and global
compelling opportunities in developed and ideally an ability to reinvest cash trade fears.
market equities, the recent repricing in future growth at equally high
in emerging markets equities resulting rates of return. The US tends to offer • We find little attraction in this asset
from trade tensions provides what us more opportunities to invest in class outside of precious metals
we believe is a short-to-medium term these kind of businesses meaning and find our risk budget better
entry point. that North America remains the deployed elsewhere.
largest geographical weighting
However, not all emerging markets are within the equity allocation. Real estate: neutral
created equal, with Asia appearing to
provide stable (albeit lower) growth Emerging markets equities: neutral • Real estate should continue
than Latin America. That said, our view to provide mild diversification
on emerging markets may change in • While markets have grown benefits. We anticipate loose
the longer run should emerging market increasingly cautious following monetary policies to favourably
equity appreciate excessively. It is for heightened protectionism fears, impact returns, although weaker
these reasons we have high conviction emerging markets equities should economic growth could prove to be
in developed market equities and benefit from attractive valuations a headwind.
remain neutral on emerging markets and steady economic activity out
equities depending on the time horizon of the region, which will continue Alternative trading strategies:
and risk budgeting of the portfolio as to underpin expansionary, albeit low conviction
a whole. softening, growth.
• We maintain a low conviction
Developed market equities: • We expect fiscal and monetary in alternatives due to their high
high conviction easing in China to counteract expense and a lack of investment
a slowdown in the region and opportunities in this space. The
• Earnings growth is still expansionary, limit downside risk to earnings limited use of leverage should
albeit slowing, with growth forecast expectations. Trade tensions still further cap returns for the
to be low-to-mid single digits over pose a significant risk but will likely asset class.
the year. Healthy fundamentals dissipate as economic pragmatism
continue to underpin the investment should eventually prevail. • Nonetheless, sudden spikes
case for this asset class, while in volatility, which are likely to
valuations are not excessively Other assets: neutral materialise more often in a late-
stretched compared to history. Alternative asset classes will continue cycle environment, may lift the
to provide diversification to our asset class at least in the short term.
• Increasingly accommodative central portfolio, but are not expected to
banks and fairly constructive macro be main drivers of returns. Gold is
data from both sides of the Atlantic set to benefit from its status as a
should support recovery globally. safe haven in the late cycle, while
This backdrop should lift the asset real estate and alternative trading
class further, even though downside strategies are underpinned by a weak
risks from trade tensions remain in investment case.
the background.
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