What if we're wrong?


  • Indicators tell us that there is more growth to come
  • But history tells us recessions can rain from clear blue economic skies
  • Nervous investors may seek solace in diversification and higher degrees of capital protection

An unknowable future...

Growth is the norm – most years world output grows because of the simple interaction between new technology and the learning curve. The inference is that we need to find good reasons for betting against that trend, with investors usually being better off assuming continued growth. Broadly speaking, history is on the side of the optimists, and that means investors are best served in the long term by tilting their portfolios towards risk assets such as equities, rather than traditional safe haven assets.

For now, our preferred indicators are telling us that the end of the cycle isn’t imminent. Until the signals start flashing amber, we see no reason to deviate from our current pro-cyclical stance. This posture is further compounded by our concern that one of the most popular safe havens, government bonds, may be offering a period of return-free risk rather than risk-free return. Even so, history tells us that recessions can rain from clear blue economic skies. For its part the International Monetary Fund (IMF) has identified several key contributors to recessions across advanced economies since 1960.

This taxonomy was only able to identify triggers for half of their sampled recessions with the remaining half caused by idiosyncratic shocks like investment swings due to ‘animal spirits’ or asset price collapses – an unknowable future indeed.


Happily, it is precisely when things go sour that the value of diversification shines through. By spreading investments across a range of asset and sub asset classes, with varying degrees of sensitivity to the economy, we insulate our portfolios against unforeseen and undesirable outcomes. Having a wider opportunity set allows portfolios to reduce their allocations to developed government bonds without having to sacrifice diversification.

Figure 1 illustrates this nicely – during the times when equities have performed poorly, developed government bonds have not been alone in providing some offset.

Capital protection

Accordingly, portfolio diversification shouldn’t be viewed in terms of a simplified bi-allocation between equities and developed government bonds, but rather in terms of its beta, or overall relationship to the equity markets. Within our client portfolios, the presence of safe havens and other diversifying assets, plus the proportions in which we own them, have been successful in restraining that beta in both good and bad times. In the current environment we still see short-maturity bonds as the most reliable nominal safe haven, providing liquid and stable ballast in portfolios.

We, of course, augment this stable, but low returning core safe haven, with some government bonds, investment grade credit, and alternative assets with a negative beta to equity markets. Furthermore, investors looking to the short term may want to explore investment structures engineered with a higher degree of capital protection.

Please view a PDF version of the article [PDF, 752KB]

Investments can fall as well as rise in value. Your capital or the income generated from your capital may be at risk.

This communication is for Barclays Private Bank customers only.

This document is from the Investments division at Barclays Private Bank & Overseas Services (“PBOS”) division and is not a product of the Barclays Research department. Any views expressed may differ from those of Barclays Research. All opinions and estimates are given as of the date hereof and are subject to change. No representation is made as to the accuracy of the assumptions made within, or completeness of, any modelling, scenario analysis or back-testing.

No representation is made as to the accuracy of the assumptions made within, or completeness of, any modelling, scenario analysis or back-testing. Barclays is not responsible for information stated to be obtained or derived from third party sources or statistical services. Barclays is not offering to sell or seeking offers to buy any product or enter into any transaction.

Any offer or entry into any transaction requires Barclays’ subsequent formal agreement which will be subject to internal approvals and execution of binding transaction documents. Any past or simulated past performance including back-testing, modelling or scenario analysis contained herein is no indication as to future performance.

Neither Barclays nor any of its directors, officers, employees, representatives or agents, accepts any liability whatsoever for any direct, indirect or consequential losses (in contract, tort or otherwise) arising from the use of this communication or its contents or reliance on the information contained herein, except to the extent this would be prohibited by law or regulation.

The value of any investment may also fluctuate as a result of market changes. Barclays is not obliged to inform the recipients of this communication of any change to such opinions or estimates. THIS COMMUNICATION IS PROVIDED FOR INFORMATION PURPOSES ONLY AND IT IS SUBJECT TO CHANGE. IT IS INDICATIVE ONLY AND IS NOT BINDING.

Barclays offers private and overseas banking, credit and investment solutions to its clients through Barclays Bank PLC and its subsidiary companies. Barclays Bank PLC is authorized by the Prudential Regulation Authority and regulated by the Financial Conduct Authority and the Prudential Regulation Authority and is a member of the London Stock Exchange and NEX. Registered in England. Registered No.1026167. Registered Office: 1 Churchill Place, London E14 5HP.

Barclays Bank (Suisse) SA is a Bank registered in Switzerland and regulated and supervised by FINMA. Registered No. CH-660.0.118.986-6. Registered Office: Chemin de Grange-Canal 18-20, P.O. Box 3941, 1211 Geneva 3, Switzerland. Registered branch: Beethovenstrasse 19, P.O. Box, 8027 Zurich. Registered VAT No. CHE-106.002.386. Barclays Bank (Suisse) SA is a subsidiary of Barclays Bank PLC.

Barclays Bank PLC Monaco is licensed to operate its activities in Monaco and falls under the dual supervision of the Monegasque regulator ‘Commission de Contrôle des Activités Financières’ (with regards to investment services) and the French regulator ‘Autorité de Contrôle Prudentiel et de Résolution’ (in respect of banking services). The registered office of Barclays Bank PLC Monaco is located at 31 avenue de La Costa, MC 98000 Monaco – Tel. + 377 93 15 35 35. Barclays Bank PLC Monaco is also registered with the Monaco Trade and Industry Registry under No. 68 S 01191. VAT No. FR 40 00002674 9.
Barclays Bank PLC (DIFC Branch) (Registered No. 0060) is regulated by the Dubai Financial Services Authority. Barclays Bank PLC (DIFC Branch) may only undertake the financial services activities that fall within the scope of its existing DFSA licence. Principal place of business: Private Bank, Dubai International Financial Centre, The Gate Village Building No. 10, Level 6, PO Box 506674, Dubai, UAE. This information has been distributed by Barclays Bank PLC (DIFC Branch). Related financial products or services are only available to Professional Clients as defined by the DFSA.

Barclays Bank PLC, Guernsey Branch is licensed by the Guernsey Financial Services Commission under the Banking Supervision (Bailiwick of Guernsey) Law 1994, as amended, and the Protection of Investors (Bailiwick of Guernsey) Law 1987, as amended. 
Barclays Bank PLC, Guernsey Branch has its principal place of business at Le Marchant House, St Peter Port, Guernsey, GY1 3BE.

Barclays Bank PLC, Jersey Branch is regulated by the Jersey Financial Services Commission. Barclays Bank PLC, Jersey Branch is regulated by the Guernsey Financial Services Commission under the Protection of Investors (Bailiwick of Guernsey) Law 1987 as amended. Barclays Bank PLC. Jersey Branch has its principal business address in Jersey at 13 Library Place, St Helier, Jersey JE4 8NE, Channel Islands.

Barclays Bank PLC, Isle of Man Branch is licensed by the Isle of Man Financial Services Authority. Barclays Bank PLC, Isle of Man Branch has its principal business address in the Isle of Man at Barclays House, Victoria Street, Douglas, Isle of Man, IM99 1AJ.

FSCS will pay compensation up to the limit that applies. Eligible cash deposits held with Barclays Bank PLC are protected up to a total of £85,000 per person by the Financial Services Compensation Scheme, the UK’s deposit protection scheme. In the UK Investment business undertaken with Barclays Bank PLC may be covered by the FSCS, eligible claims are covered up to a maximum of £50,000 per person. Please note the FSCS does not cover losses caused by a fall in the value of an investment.