Welcome to the May edition of “Market Perspectives”, the monthly investment strategy update from Barclays Private Bank, which is also available to download as a PDF [PDF, 1.5MB].
This month, global equities are close to record highs and oil prices are shifting amid significant political uncertainty and a late economic cycle. Read what this means for investors as well as why we have a preference for emerging market hard currency sovereign bonds.
Head of Investments Private Bank and Interim Head of Private Bank EMEA
A resurgence of political risks in Europe?
Between 23 and 26 May 2019, more than 500 million people in 28 countries will vote to elect the 751 members of the European Parliament, assuming the UK participates in the election. The showing of the anti-EU political parties will test voter sentiment, not least in the UK and Italy. Is an Italian crisis the biggest risk facing Europe?
Investing in a late cycle
A combination of high volatility in the fourth quarter and worrying signs about the economic cycle has proven supportive for quality stocks. One index tracking higher quality companies has outperformed the broader US market by close to 500 basis points in the last six months. So will this trend persist?
Enhancing total returns with yields
Investors should be selective when investing in emerging markets bonds due to the diversity of emerging markets (EM). This translates to different risk and return profiles and valuations within EM. For instance, while Brazilian and Russian government and corporate bonds in aggregate trade closer to their five-year spread lows, Argentinean, Turkish or Mexican bond spreads are still trading wide.
The risk of an inflation surprise
Dovish central banks are likely to support growth but policy could translate into inflation surprising to the upside. Unlike many previous cycles, tight labour markets appear to have exerted little upward pressure on prices. That said, the oil price has risen more than 50% since its December low and looks set to help boost inflation shortly.
Secondary funds: a good alternative
Private capital allows investors to harvest an illiquidity premium and diversify away from publicly traded markets. It opens investment opportunities that are of a different nature to traditional assets. But an investment in private capital is only possible if the liquidity needs are already covered. So what are the pros and cons of this type of investment?
Equities outlook: time for a spring break?
With this year’s bounce in equities taking global equities close to new all-time highs, we believe it’s too early to turn even more constructive. We expect some consolidation in the short term with a preference for US and emerging markets assets. We also look at which sectors we prefer given that it seems too early to be defensively positioned.
Fixed income outlook: another Italian drama on the way this summer?
Italian government bond spreads have retreated significantly since the highs of October 2018. However, upcoming renewed budget discussions and political uncertainty may lead to higher volatility that is being underpriced in the market. Italian banks look particularly vulnerable to a period of heightened volatility. Is it time to be more selective and focus on higher quality bonds?
Tactical asset allocation
A recession still looks over twelve months away. We believe short duration bonds are poised to cope with a flattening yield curve. Similarly, persisting earnings growth and more dovish monetary policy are likely to underpin developed equities, especially structural growth opportunities. Meanwhile, we are more cautious about the prospects for high-yield bonds at this late stage of the cycle.
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