Welcome to the September edition of “Market Perspectives”, the monthly investment strategy update from Barclays Private Bank, which is also available to download as a PDF [PDF, 667KB].
With increasing geopolitical tensions and recession worries, volatility is back at levels rarely seen this year. A systemic volatility strategy may be one solution in such conditions. The strategy usually performs best when volatility is high, aiding portfolio diversification as risk assets underperform.
Heightened political uncertainty, trade tensions and a late-cycle growth slowdown cloud sentiment towards Europe. For now, we remain cautious. However, there are investment opportunities. If policymakers can get their act together, the outlook for Europe could be very promising.
Financial markets increasingly priced in a no-deal Brexit in August. The political drama is likely to further hit economic confidence and sentiment in UK markets, especially sterling. However, recent commitments to more government spending may alleviate the effects of any recession.
Surging levels of financial leverage has helped make BBB-rated bonds the largest segment of the investment grade debt market. However, as fears mount of higher default rates, many doubt the outlook for the bonds. Despite the risks, we believe BBB-rated debt has many appealing features to offer investors.
Despite August’s sudden correction, US equities have traded in a relatively tight range for much of the year. US-China trade tensions show little sign of a deal being struck soon. That leaves central banks as the best drivers of delivering the ambitious policy mix markets need to break decisively higher.
The oil price entered a bear market in August, from its April peak, partly in response to global growth worries and trade tensions. The potential for supply shocks in coming months and plans to extend production cuts hint at a recovery in the oil price. That said, intermittent drops in the price are likely.
Jean-Damien Marie and Andre Portelli
Co-heads of Private Bank Investments
Market corrections do not equal recessions
Placing too much faith in financial markets’ ability to call a recession can lead to bad investment strategy. August’s “bull market” correction was triggered by signals that a recession was imminent. But should investors take heed of the correction or ignore it and stay invested?
When volatility is your friend
Investing conditions were tough in August as volatility climbed sharply on worrying signs of a nearing recession. Volatility options strategies tend to perform well when volatility in high. So with volatility again back in fashion, is it time to consider if diversifying portfolios with such options strategies is suitable?
As political uncertainty rages across Europe late in the cycle, trade tensions escalate and growth stutters, the outlook for continent looks bleak. With more political stability and a few policy shifts, the outlook would improve. So is the bull case for European assets, and potential boost to investment rewards, nearer than many think?
Assessing Brexit risk
As the 31 October Brexit deadline looms, the market is increasingly pricing in a no-deal UK exit from the European Union, while a UK general election remains a possibility. Amid the considerable uncertainty and worsening economic data, what is the outlook for the UK economy and financial markets?
BBB-rated bonds: a cause of concern?
Leverage in the non-financial sector has soared since 2008. At the same time the proportion of BBB-rated bonds has surged to become the largest segment of the investment grade bond market. Given the late stage of the cycle and potential for higher default rates, how worried should investors be?
What’s needed to launch equities?
With US-China trade tensions unlikely to be resolved soon and markets spooked by worrying recessionary signs, monetary policy seems the last hope for markets to break significantly higher. Yet, with expectations of easier policy high already, how should equity investors position themselves?
Oil price: reverting to fundamentals?
Weaker growth prospects and rising oil output have driven oil prices lower since April’s high and into a bear market. However, will rising risks of supply shocks and a restatement of fundamentals help the oil price recover?
Multi-asset portfolio allocation
The economic cycle looks far from over, as attention focuses 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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