Market Perspectives February 2021
Welcome to the February 2021 edition of “Market Perspectives”, the monthly investment strategy update from Barclays Private Bank, which is also available to download as a PDF [PDF, 612KB].
As a new US president takes charge, COVID-19 vaccines roll out around the world and several equity markets hit fresh highs, investors start the year in optimistic mood. That said, this year is likely to be volatile, as seen with the current tug of war between retail investors and Wall Street, and much can go wrong.
As the president tackles the effects of the pandemic, he proposes a $1.9tn relief package. This would help support short-term US growth prospects. Green infrastructure investments and more big tech-related regulation are also likely to be high on the Democrat’s agenda. As vaccinations roll out apace, we now expect the economy to expand 6.2% this year.
Equities welcomed the president and his spending plans with a ‘Biden bounce’. Some investors may be hesitant to invest at stretched valuations, by some measures.
However, with low bond yields, the equity risk premium points to equities being fairly valued. Investing in the asset class still seems a sensible decision for long-term investors. As the idea of a “reflation” trade gains traction, slightly increasing the cyclicality of portfolios looks attractive, while keeping in mind the overarching need for “quality”.
Meanwhile, the splurge in stimulus spending is helping to fuel rising inflation expectations in bond markets. The recent steepening in the rate curve bears this reflation trade out. A recovery backed by monetary and fiscal support is likely to help lift prices. But rises are likely to be contained. BB-rated bonds are performing well and should keep doing so. That said, carry looks like being a key driver of returns, while also making the most of volatile periods.
And with the president set to make the US economy greener, stimulus spending is likely to boost sustainable infrastructure investment. Biden’s rejoining of the Paris Accord on his first day in office sets the change of tone. The impact of America taking tougher climate change measures would create potential portfolio risks and opportunities. Investors might consider reviewing their exposure to them.
Many traditional equity and bond investment strategies are having a tough time in an era of low rates and stretched valuations. While a bear market seems unlikely, a correction may be near. While timing a correction is unpractical, diversification can play a role in aiming to preserve wealth in sell-offs. Gold, hedge funds and private markets seem attractive diversification candidates. The assets promise positive returns through the cycle while usually providing an asymmetric risk/return profile to portfolios.
Jean-Damien Marie and Andre Portelli
Co-Heads of Investment, Private Bank
Can Biden revive America?
Amid a pandemic and domestic tensions, how might the US be reshaped by the new Democratic administration and what might it mean for growth prospects?
Brexit - where are we now?
With the EU and UK agreeing a Brexit trade deal, just what has been agreed? While the deal makes UK assets more investible, caution still seems warranted when investing in UK assets.
Beware misleading valuation metrics
As many equity markets hit record highs, some earnings ratios are flashing red and investors may be hesitant to invest. However, with bond yields still relatively low, there remains good reason to invest in equities for the long term.
Keep calm and carry on
Many investors seem to expect much stronger inflation and higher rates. While somewhat higher rates seem possible, this is likely be to be contained. Earning carry and profiting from volatility could be key to generating returns this year.
Alternatives to strengthen a portfolio
With many asset valuations seemingly expensive and rates likely to remain low, it may be time to diversify traditional holdings with alternatives.
Green plans for the US
With climate change a key priority for the new US administration, what might the potential implications be for your portfolios?
New year, new strategy?
A new year may be a fresh start, but that doesn’t mean that your previous investment thesis is out of date. Periodically reviewing a portfolio is sensible, but so is making constrained and thoughtful changes for the long term.
Multi-asset portfolio allocation
We discusses asset allocation views within the context of a multi-asset class portfolio. Our views elsewhere in the publication are absolute and within the context of each asset class.
For our India clients
Is it time to think beyond the pandemic?
The Indian government has delivered a bold budget to target recovery. As the pandemic lingers, allocating assets with appropriate diversification is key.