Market Perspectives March 2020
Welcome to the March edition of “Market Perspectives”, the monthly investment strategy update from Barclays Private Bank, which is also available to download as a PDF [PDF, 539KB].
The growing spread of the coronavirus outbreak is the main driver of financial markets for now. Sizeable falls and heightened volatility have been see in most asset classes. There remains little clarity on the likely effect on global output of the outbreak. That said, a deep global recession looks unlikely at this stage.
The coronavirus epidemic has added to the downward pressure on elevated consensus earnings expectations for 2020. We believe that global earnings will, at best, grow by mid-single digits this year. However, opportunities to add value remain and having a diversified portfolio is key.
In the fixed income world, the rise in volatility has seen a rush to bonds and pushed US 10-year treasuries to a record low. In turn, with the US Federal Reserve cutting interest rates by 50 basis points, central banks are expected to keep rates lower for longer in the wake of the economic effect of the coronavirus.
In contrast to substantial moves in commodity markets, especially gold and oil prices, private markets have been little affected by the reaction to the virus. Short of a severe recession they should continue to perform well, highlighting the attractions of diversifying portfolios with exposure to private markets.
In the rush to place more emphasis on sustainability in investment strategies, green bonds are increasingly popular. Yields and spreads on the bonds compare favourably with conventional ones. With more regulators promoting such financing and a growing, wide base of investors and issuers, green bonds appear here to stay.
Finally, one of the biggest factors facing investors in a move to a low carbon world is identifying the transition risk in their portfolios. Oil producers and other high-carbon emitters are clearly most exposed, but so are many others to some degree. As climate change-related risk grows, so the potential transition risks mount.
Jean-Damien Marie and Andre Portelli
Co-heads of investment, Private Bank
The private markets hedge
The outbreak of the coronavirus and its potential drag on growth has hit many asset classes, especially oil. Meanwhile, private markets have been largely untouched. With more periods of elevated volatility likely this year, allocations to the asset class may help limit the impact of turbulence on portfolios.
The UK budget: time to throw caution to the wind?
After a sizeable election win in December, the new UK government prepares to unveil its first budget. Just how much public spending headroom is available for the new chancellor to help “level up” the country? And with signs that more administrations around the world are prioritising government spending, how much of a trailblazer will the UK be?
Equities have had a turbulent start to the year. Financial markets have already been hit by the coronavirus epidemic, and its potential effect on growth expectations, a US attack on Iran and the start of the US election race. How should investors position portfolios when volatility is likely to be to the fore this year?
Back to the future
The demand for bonds seems unstoppable in a rush to safe havens in the wake of the coronavirus scare. Financial markets now expect more interest rate cuts than previously thought, with yields on the asset class cursed to stay lower for longer, are opportunities to lock in yields still available?
Is your portfolio ready for the low-carbon world?
As governments shorten periods to shift to a low-carbon emitting world to counter climate change, companies face a range of risks associated with the transition. Whether it’s increased regulatory costs, the sustainability of business models or reputation, all businesses will be affected. What can investors do when making investments to assess exposure to this transition risk?
The new bonds on the block
Green or sustainable bonds may not have been around for long, but are attracting much investor interest as flows into sustainability investments surge. Fresh climate change initiatives by regulators in Europe and elsewhere, backed by growing issuance and demand, suggest that green bonds are here to stay. But how do they compare with conventional debt?
Multi-asset portfolio allocation
The economic cycle seems far from over, with attention focused on the potential effects of the coronavirus on growth and central bank policy. In fixed income, we favour emerging market bonds as a way to boost returns late in the cycle. Similarly, earnings expansion and dovish policy should underpin developed market equities. We are cautious on high yield bond prospects.