What if we're wrong?


  • Indicators tell us that there is more growth to come
  • But history tells us recessions can rain from clear blue economic skies
  • Nervous investors may seek solace in diversification and higher degrees of capital protection

What if we are wrong

An unknowable future...

Growth is the norm – most years world output grows because of the simple interaction between new technology and the learning curve. The inference is that we need to find good reasons for betting against that trend, with investors usually being better off assuming continued growth. Broadly speaking, history is on the side of the optimists, and that means investors are best served in the long term by tilting their portfolios towards risk assets such as equities, rather than traditional safe haven assets.

For now, our preferred indicators are telling us that the end of the cycle isn’t imminent. Until the signals start flashing amber, we see no reason to deviate from our current pro-cyclical stance. This posture is further compounded by our concern that one of the most popular safe havens, government bonds, may be offering a period of return-free risk rather than risk-free return. Even so, history tells us that recessions can rain from clear blue economic skies. For its part the International Monetary Fund (IMF) has identified several key contributors to recessions across advanced economies since 1960.

This taxonomy was only able to identify triggers for half of their sampled recessions with the remaining half caused by idiosyncratic shocks like investment swings due to ‘animal spirits’ or asset price collapses – an unknowable future indeed.


Happily, it is precisely when things go sour that the value of diversification shines through. By spreading investments across a range of asset and sub asset classes, with varying degrees of sensitivity to the economy, we insulate our portfolios against unforeseen and undesirable outcomes. Having a wider opportunity set allows portfolios to reduce their allocations to developed government bonds without having to sacrifice diversification.

Figure 1 illustrates this nicely – during the times when equities have performed poorly, developed government bonds have not been alone in providing some offset.

Figure 1

Capital protection

Accordingly, portfolio diversification shouldn’t be viewed in terms of a simplified bi-allocation between equities and developed government bonds, but rather in terms of its beta, or overall relationship to the equity markets. Within our client portfolios, the presence of safe havens and other diversifying assets, plus the proportions in which we own them, have been successful in restraining that beta in both good and bad times. In the current environment we still see short-maturity bonds as the most reliable nominal safe haven, providing liquid and stable ballast in portfolios.

We, of course, augment this stable, but low returning core safe haven, with some government bonds, investment grade credit, and alternative assets with a negative beta to equity markets. Furthermore, investors looking to the short term may want to explore investment structures engineered with a higher degree of capital protection.

Please view a PDF version of the article [PDF, 1.4MB]

Investments can fall as well as rise in value. Your capital or the income generated from your capital may be at risk.

This communication is for Barclays Private Bank and Overseas Services customers.

This document is from the Investments division at Barclays Private Bank & Overseas Services (“PBOS”) 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 are given as of the date hereof and are subject to change.

No representation is made as to the accuracy of the assumptions made within, or completeness of, any modelling, scenario analysis or back-testing. Barclays is not responsible for information stated to be obtained or derived from third party sources or statistical services. Barclays is not offering to sell or seeking offers to buy any product or enter into any transaction.

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, modelling or scenario analysis contained herein is no indication as to future performance.

Neither Barclays 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.

The value of any investment may also fluctuate as a result of market changes. Barclays is not obliged to inform the recipients of this communication of any change to such opinions or estimates. THIS COMMUNICATION IS PROVIDED FOR INFORMATION PURPOSES ONLY AND IT IS SUBJECT TO CHANGE. IT IS INDICATIVE ONLY AND IS NOT BINDING.

This document is not directed to, nor intended for distribution or use by, any person or entity in any jurisdiction or country where the publication or availability of this document or such distribution or use would be contrary to local law or regulation. It may not be reproduced or disclosed (in whole or in part) to any other person without prior written permission. You should not take notice of this document if you know that your access would contravene applicable local, national or international laws. The contents of this publication have not been reviewed or approved by any regulatory authority.

This document was drafted by and the views presented are those of Barclays Bank (Suisse) SA as of the date of the brochure and may be subject to change in the future. The information contained in this document is intended for general circulation only. This document shall not constitute advice or an offer by Barclays Bank (Suisse) SA to subscribe to any service or product or enter into any transaction.

All legal terms and conditions are to be found in the general account terms and conditions of Barclays Bank (Suisse) SA together with the legal terms and conditions of the product or service offered. Barclays Bank (Suisse) SA has made every effort to ensure that the information contained in this document is reliable, exhaustive and accurate.

This document is general in nature and does not take into account the specific investment objectives, financial situation, knowledge, experience or particular needs of any particular person. The products and services presented in this publication may not be appropriate or suitable for all investors. Advice should be sought from a financial adviser regarding the appropriateness and suitability of the investment products and services mentioned herein, taking into account your specific objectives, financial situation, knowledge, experience and particular needs before you make any commitment to purchase any such investment services or related products.

Neither Barclays Bank (Suisse) SA nor any of their respective officers, partners or employees accepts any liability whatsoever for any direct or consequential loss arising for any use of or reliance upon this publication or its contents, or for any omission.