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Market Perspectives

02 August 2019

Welcome to the August edition of “Market Perspectives”, the monthly investment strategy update from Barclays Private Bank, which is also available to download as a PDF [PDF, 503KB].

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 outperform safer ones late in the cycle. In the current late-cycle environment, equities and emerging markets debt look set to outperform. That said, security selection and having active strategies will be key.

Major central banks’ increasingly dovish tone has triggered record flows into most parts of the bond market, resulting in depressed rates and spreads. As we head deeper into the cycle, and with ever higher levels of leverage, a diversified and selective approach to bond investing is key.

At a time when investors are keen to boost income, opportunities in emerging markets debt may offer one possible solution. In doing so, research shows that environmental, social and governance issues can add value to security selection and improve portfolio performance.

The gold price has bounced by close to 11% this year, as geopolitical tensions intensify and rate-cut expectations grow. Rather than looking to make investment gains from holding gold, we believe the yellow metal’s key attribute for investors is as a diversification tool.

“Safe” assets and risk assets have been positively correlated this year, as good news is seen as bad by financial markets. Continuously improving growth is set to return risk assets to the normal state of affairs, where good news is seen as good, perhaps later this year.

Jean-Damien Marie and Andre Portelli
Co-heads of Private Bank Investments

When good news is bad

The usual correlation between bonds and risk assets has broken down this year as good news is seen as bad by the markets. We need a continuous improvement in growth data for risk assets to return to the normal “good news is good news” regime. This is unlikely in the next month or two but could happen later in 2019.

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A closer look at late-cycle performance

The question on many investors’ lips is whether risk assets will stay true to form and outperform safer assets late in the cycle. Expectations of more central bank policy easing support the case for risk assets. In such an environment, equities and emerging markets debt look set to outperform. That said, security selection and having active strategies will be key.

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Selecting for alpha in emerging markets debt

Research shows that including environmental, social and governance (ESG) issues in fixed income investment decisions can improve portfolio performance. At a time when investors are keen to boost income, opportunities in emerging markets debt may offer one possible solution. In doing so, security selection will be key. So how does ESG add value to security selection?

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Equities at a tipping point

Despite US equities hitting an all-time high in July, we keep our end-year forecast at 3000. While there may be an urge to reduce risk after the strong performance by equities, is this a good idea? Accommodative central bank policy looks set to support equity valuations for some time yet.

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Time to be selective in fixed income

Major central banks recent dovish tone and monetary support has led to record flows into fixed income assets, resulting in depressed rates and spreads. As we head deeper into the cycle, and with ever higher levels of leverage, a diversified and selective approach to bond investing is key.

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Golden moment

Investors are flocking to gold as geopolitical tensions rise and major central banks lower interest rate expectations. Gold can be used to preserve wealth during turbulent times. However, rather than looking to make investment gains from holding gold, the yellow metal’s key attribute is as a diversification tool.

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Multi-asset portfolio allocation

The economic cycle seems far from over, with all eyes on central bank policy and trade tensions. We favour emerging markets bonds as a way to boost returns this late in the cycle. Similarly, earnings growth and dovish policy should underpin developed market equities, especially structural growth opportunities. We are cautious on high yield bond prospects with valuations looking expensive.

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