Market Perspectives March 2021
Welcome to the March 2021 edition of “Market Perspectives”, the monthly investment strategy update from Barclays Private Bank, which is also available to download as a PDF [PDF, 589KB].
With the vaccine rollout going well, economic growth seems likely to pick up much of the ground lost by last year’s slump. Both the UK and US may be able to achieve herd immunity in the second quarter, setting the scene for a splurge in consumption and healthier employment prospects. The authorities face a difficult balancing act in judging the appropriate level of support as recovery takes hold.
Encouraging vaccine rollout news helped equities start the year with a bang. Fourth-quarter company earnings are also beating consensus by a surprising amount. We have raised our fair value estimate for equities towards a bull case scenario. But much can still go wrong. This suggests favouring “quality” companies with resilient free cash flows and attractive growth prospects.
Conversely to equities, this has been a tough year so far for bond investors with sell-offs and rate spikes. Yields are rising ahead of anticipated recovery that may spark inflation fears and may trend slightly higher yet. That said, the market seems heavily focused on upside risk, suggesting more yield spikes. At the same time potential economic uncertainty and central bank policy commitment should not be ignored.
Turning to sustainable investing, renewable energy indices have strongly outperformed their standard peers in the last year, a period of high uncertainty. Environmental, social and governance funds joined the outperformance party, on a smaller scale. But is this being a sign of frothy valuations and investor over-exuberance? Perhaps. But despite the downside risks, sustainable investing has the hallmarks of a long-term structural shift, supported by governments, rather than a bubble.
For all the optimism, potential downside risks lurk. The probability of extreme, tail risk, events occurring should be borne in mind when managing portfolio risk. Hedging offers one route to help manage tail risk at a time when bouts of heightened volatility look likely. In doing so, investors might consider employing hedge fund managers with robust processes and proven investment methodologies.
Jean-Damien Marie and Andre Portelli
Co-Heads of Investment, Private Bank
Recovery prospects: hopes and risks
Is this the year of the bounce? Last year’s pandemic-induced slump was the worst since the Great Depression. With vaccination rates rapidly rising, economies reopening and policymakers acting aggressively, what risks might derail a quick recovery?
Equity bulls in charge
High hopes of a vaccine-driven recovery have powered many equity markets to record levels. Given potential vaccine problems, timing of fiscal and monetary policy retreats and threats of inflation, are valuations overstretched?
Risk of rising real yields seems real
Bond yields have spiked higher this year and may have further to climb with a vaccine-led recovery appearing in sight along with potential uplift in inflation. At the same time, potential economic uncertainty and the US Federal Reserve’s commitment to ultra-low rates and policy should not be ignored.
Focusing on the long run
With COVID-19 vaccine rollouts taking place in many countries, hopes of economic normalisation are rising. Do expectations of a strong recovery, coupled with structural changes, call for a review of asset allocation policy?
Hedging downside tail risk
Financial markets appear priced for a vaccine-driven recovery this year. But much can go wrong. More spells of heightened volatility seem likely, especially around pandemic developments and fiscal or monetary policy. What options are available for investors wanting to manage portfolio risk, especially tail risk?
Is there an ESG bubble?
Capital is flooding into sustainable investing. More than €1tn is allocated to European sustainable funds alone. Is a bubble forming? Probably not, though there are clearly downside risks. How can investors avoid the froth to find long-term sustainable investment opportunities as the world turns green?
Staying invested is not always plain sailing
As vaccines roll out and economic recovery seemingly nears many risks to the upside and downside abound, not least the pace of a recovery and potential vaccine-resistant COVID-19 variants. However, staying invested seems key to meeting your long-term investment objectives.
Multi-asset portfolio allocation
Signs of the US and UK achieving herd immunity by June are encouraging, aiding economic recovery hopes. In fixed income, developed market government bonds appeal. Dovish policy should underpin “quality” developed market equities and gold, though volatility may rise in the near term. However, we remain cautious on prospects for high yield bonds.
For our India clients
Indian déjà vu?
This article looks at the likely economic effects of signs of resurging COVID-19 infections in India. However, government spending and encouraging earnings data underpin prospects for equities and “quality” ones appeal. With bond market sentiment subdued, diversifying portfolios remains key, perhaps with exposure to private assets.