Financial markets: Q&A

23 January 2020

5 minute read

Since publishing our Outlook 2020 in mid November, we have met numerous clients. The article below reviews the main questions on their mind.

Should I fear a recession?

No. Although a recession is always a risk, especially for growth-sensitive assets such as equities, high-yield bonds or industrial commodities, we do not expect a global recession in 2020. Last year, the inversion of the US yield curve was seen by many as a sign of impending recession. But based on the fundamental data like economic growth, we always thought that those risks were overstated.

The yield curve has now reverted to its typical, upward slopping, shape and other indicators tracking recession risks, such as the New York Fed recession gauge, are off their highs. While a 2020 recession can’t be completely ruled out, we don’t think that the risk is high.

Fear of recession is starting to reverse in markets

What about stretched asset valuations?

It is true that valuations are demanding for most asset classes. However, valuation is a very poor indicator to determine short-term performance. There is almost no correlation between valuations and the performance of an asset class over the next 12 months.

Short-term performance evaluation

Valuation is relevant when assessing long-term (more than five years) return expectations. High valuations indicate that returns for the next few years, at the asset class level, are probably going to be lower than they have been in the past 10 years.

Current valuation points to lower as opposed to outright negative future returns

So shouldn’t I just hold cash?

While returns over the next few years might be lower, holding cash will provide you with real negative returns at the moment. The key metric to look at is real rates, that is nominal rates adjusted for inflation. This metric is negative in much of the developed world. This means that the purchasing power of a cash holding falls with every passing day.

While returns might not be as high as they have been since 2008, we still expect a mix of asset classes to deliver positive real returns over the next few years.

Holding cash gives you a negative real return

Given the risks, why not buy on the dip?

Yes, there are lots of “known unknowns” and we highlighted the main risks in our Outlook 2020 (such as an inflation surprise, higher yields, trade tensions and geopolitical risks). In the current environment there are more candidates than usual that could trigger market-disrupting events. But corrections during bull markets are usually short-lived and notoriously difficult to time. They last between 1-3 months on average and markets then typically recover over 2-3 months.

But despite this, timing the market is a futile exercise which has more to do with luck than skill. In contrast, selecting a diversified portfolio of quality assets which is likely to outperform in the long term requires more skill than luck.

What type of investment do you like?

As we discussed in more details in our Outlook 2020, we think that diversification, active management and yield enhancement are three characteristics that we look for when investing in the current market environment.

We have a preference for emerging market debt within fixed income, while quality companies able to generate steady cash-flow remain our preference when it comes to equities. While gold on its own is not attractive, it provides welcome diversification when part of a broad, cross-asset portfolio.

Related articles

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 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.