Equities at tipping point

02 August 2019

3 minute read

By Julien Lafargue, Head of Equity Strategy

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 all-time highs in July, many investors consider the current backdrop to be “toppy”. We share some of that feeling and do not feel compelled to revisit our fair value estimate (S&P 500 index around 3000 at the end of 2019) just yet. But we also caution against the urge to take too many chips off the table.

Our cautiousness is a result of what we would consider unreasonable expectations. Indeed, our assessment is that the market is discounting some sort of perpetual “goldilocks” scenario whereby growth is neither too good nor too bad and central banks continue to provide ample liquidity. Although this may happen (it’s arguably been the case for more than 10 years now), the market’s perception is likely to change.

In other words, we believe that sentiment is more likely to shift back and forth between recession fears and goldilocks than it is to stay perfectly still.

Be wary of reducing portfolio risk

Our cautiousness on the outlook for equities suggests reducing risk ahead of what looks like another – possibly significant (or more than 10%) – drawdown.

However, we see two main reasons why cutting risk aggressively may not be a good move. First, going against central banks has been a losing strategy for years and this is unlikely to change. While the long lasting impact of quantitative easing and negative interest rates is questionable, from a short-term equity market perspective, there is no doubt their effect is positive. Indeed, should markets become volatile again, we would expect further intervention from central banks.

Second, our cautiousness is echoed by many investors who prefer to wait on the sidelines. This idling capital is earning next to zero and represents a significant drag on performance.

Should market sentiment deteriorate temporarily, long-term investors are likely to “buy the dip”, supporting equity prices and preventing a large pullback.

Our message remains unchanged: stay invested but ensure portfolios are exposed to the appropriate level of risk and look for idiosyncratic opportunities (rather than market beta).

Looking ahead

As we look towards the remainder of 2019 and the beginning of 2020, we continue to see a backdrop where both economic and earnings growth should allow equities to gain ground. The main question revolves around valuations. Multiples, in particular in the US, have expanded significantly in the last six months and it is difficult to argue for further expansion (see chart below). As such, returns are likely to be more muted, at least at the index level.


Market Perspectives August 2019

Find out our latest key investment themes. As expectations of more dovish central bank policy grow and early signs of a potential thaw in trade tensions, sentiment has turned for the better. However, with many geopolitical issues on the horizon and several financial markets close to record highs, is it time to de-risk portfolios?


We give you versatility and a choice of services

Barclays Private Bank provides discretionary and advisory investment services, investments to help plan your wealth and for professionals, access to market.

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

This document has been issued by the Investments division at Barclays Private Banking and 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 included in this document constitute our judgment as of the date of the document and may be subject to change without notice. No representation is made as to the accuracy of the assumptions made within, or completeness of, any modeling, scenario analysis or back-testing.

Barclays is not responsible for information stated to be obtained or derived from third party sources or statistical services, and we do not guarantee the information’s accuracy which may be incomplete or condensed.

This document has been prepared for information purposes only and does not constitute a prospectus, an offer, invitation or solicitation to buy or sell securities and is not intended to provide the sole basis for any evaluation of the securities or any other instrument, which may be discussed in it.

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, modeling or scenario analysis contained herein does not predict and is no indication as to future performance. The value of any investment may also fluctuate as a result of market changes.

Neither Barclays, its affiliates 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.

This document and the information contained herein may only be distributed and published in jurisdictions in which such distribution and publication is permitted.  You may not distribute this document, in whole or part, without our prior, express written permission. Law or regulation in certain countries may restrict the manner of distribution of this document and persons who come into possession of this document are required to inform themselves of and observe such restrictions.

The contents herein do not constitute investment, legal, tax, accounting or other advice. You should consider your own financial situation, objectives and needs, and conduct your own independent investigation and assessment of the contents of this document, including obtaining investment, legal, tax, accounting and such other advice as you consider necessary or appropriate, before making any investment or other decision.