Markets Weekly Podcast - 19 Oct 2020

Welcome to your Markets Weekly podcast. This week Damien Payiatakis, Head of Sustainable Impact Investing at Barclays Private Bank, discusses how impact investing is set to double over the next five years. He joins our host Henk Potts, Market Strategist for EMEA at Barclays Private Bank, in looking at the key drivers behind this demand, last week’s market movements and what we can expect in the week ahead.

Henk Potts (HP): Hello it's Monday the 19th of October and welcome to the Barclays Private Bank Markets Weekly podcast, a weekly recording that will guide you through the turmoil of the global economy and financial markets.

My name is Henk Potts, market strategist at Barclays Private Bank, and each week I'll be joined by guests to discuss both the risks and opportunities for investors. This recording will last around about 15 minutes and will be broken down into three component parts.

Firstly, I’ll analyse the events that moved the markets and grabbed the headlines over the course of the past week. I’ll then move onto our focus section where we’ll spend a few minutes discussing a specific investment theme.

This week I'm pleased to say our special guest is Damian Payiatakis: Head of Sustainable Impact Investing for Barclays Private Bank. We will discuss the ‘Investing for Global Impact’ report whose headline finding is that global private wealth holders are set to almost double portfolio allocation to sustainable investing over the course of the next five years.

Finally, I'll conclude by previewing the major events and data releases that are likely to shape the week ahead.

But first let's start by reviewing the markets last week. Record daily virus cases, fading pre-election stimulus hopes, disappointing labour data on both sides of the Atlantic pushed investors, it has to be said, into mild risk off mode during the course of last week.

Global equities came under pressure during the course of the trading week as major cities around the world, specifically in Europe, implemented varying degrees of lockdowns, adding to concerns that the restrictions will derail the recovery and cause longer term economic damage.

Although, negative sentiment was tempered by strong trade data out of China, US retail sales, which rose at their fastest rate in three months in September, and steady corporate results. Over the course of the week the S&P 500 was little changed, the STOXX 600 in Europe registered a loss of eight tenths of 1%.

The IMF has issued its latest forecast and predicted the global recession this year would be less bleak than its previous forecast, now seeing GDP shrinking 4.4% this year compared to the 5.2% drop seen in June as they upgraded activity in the US and Europe and counted for a sharper recovery in China.

However, the 4.4% would still constitute the deepest contraction since the Great Depression. The IMF outlook said the recovery is not assured while the pandemic continues to spread and that's very much in line with the view that we've been making.

Future growth prospects we believe will inevitably be determined by the life span, the intensity and the geographical spread of the virus. However, given the scale of the contraction this year, the tentative reopening of economies and the fast level of stimulus instigated by policymakers, we are projecting a significant recovery during the course of 2021 with global growth forecasted to be 5%.

The latest growth figures from China have come in this morning, they signal further evidence of a V shaped recovery in the world's second largest economy. GDP jumped 4.9% in the third quarter, I have to say that’s slightly below expectations, economists were looking for a figure closer to 5.5%.

Those numbers were impacted by higher imports but it is an acceleration from the 3.2% expansion in the second quarter. For the year to date output is now positive, it's up seven tenths of 1%. Beneath the headline number we see industrial production, retail sales beat estimates.

Industrial production was up 6.9% in September back to pre-pandemic levels but it's really the acceleration in September's retail sales that seems the most important component, as it points to a broadening out of the recovery.

Sales are up 3.3% compared to plus 0.5% in August. Property investment remains robust. What we've seen in China is a strong recovery with controlled stimulus. Of course there are some risks there: weaker external demand, elevated debt levels and the potential acceleration of the trade dispute with the United States.

But with full year growth expected to come in around 2.3%, China is the only major region to generate growth during the course of this year. It is expected to provide a quarter of global growth in 2021. China we think is very much in a sweet spot of loose monetary conditions and strengthening economic momentum.

As such and given its attractive long term growth prospects, China remains our preferred emerging market.

Turning to UK data, the long awaited pickup in unemployment started to shine through in the August figures and expected to accelerate aggressively over the course of the next couple of months. If you look at the ONS figures it shows UK job cuts jumped the most on record in the three months through August; the number of redundancies climbed 114,000 in the June to August period.

The number of employees on payrolls in September was down 673,000 compared to where we were back in March. UK unemployment rate pushed up to 4.5%, remember that's the highest since 2017 standing at 1.52 million.

Worse as I say is expected to come as the furlough scheme is replaced by the less accommodative job support scheme, strict local lockdowns infringe upon activity, Brexit disruption holds back business investment.

In terms of where UK unemployment is likely to go from here well the trend is clearly rising. We expect UK unemployment to rise to 8.8% during the course of this quarter but then start to improve as you look through 2021.

The end of next year we've got UK unemployment rate at 5.7%. That of course would still be substantially higher than the start of the pandemic when the unemployment rate was at 3.9%.

On the corporate front, investors spent much of the week analysing US banks’ third quarter results. Somewhat of a mixed performance: JPMorgan, Goldman Sachs, Morgan Stanley, I think posted consensus beating results driven by surging revenue in capital markets particularly from fixed income trading.

However, Bank of America and Wells Fargo fell short of analysts’ expectations. In terms of the outlook for the sector still remains challenging, a prolonged period of ultra-low interest rates will continue to weigh on net interest margins, the acceleration in trading revenue is unsustainable, loan provisions are likely to remain elevated for some time.

For the investment outlook, I think valuations as we know are exceptionally cheap by historic standards but the uncertain economic backdrop, unfavourable policy environment coupled with the ban on share buybacks and caps on dividends suggest it's a sector that's likely to remain out of favour.

So now let's move on to our focus section. Damian good to have you with us today.

Damian Payiatakis (DP): Pleasure to be here Henk

HP: Investing for global impact report is now in its 7th year. We're proud to say that Barclays Private Bank is the lead sponsor. It’s the leading global report on sustainable investing and giving for impact.

Target audience as we know is individuals, family offices, as well as charities and foundations. The report covers a range of topics: there’s motivations, portfolio and strategy, asset classes and themes, and no surprise some special themes this time around including COVID-19 and climate change.

Damian, as we mentioned at the top of the podcast, the concept of impact investing is increasingly resonating with the world’s wealthy. Why do you think we're seeing the increase in activity?

DP: From an external perspective we are seeing increased media visibility and marketing hype around the idea of sustainable investing and so at Barclays we wanted to get beneath that surface.

So that's why we supported this research alongside Campden and just to get a better understanding of investors’ attitudes and their actions.

And in this year's survey we had just over 300 of those individuals and families and family offices from 41 countries. And I think impressively, the average net worth was about 876 million, and they were really sharing their perspectives on the field in the portfolios.

And to your question, when we asked them about their top three motivations they illustrate what we're really seeing the increased interest being driven by. Foremost, 38% said they had a responsibility to make the world a better place. The idea that fundamentally they had a role given the wealth and the privilege that they had in their position to do something with that.

Secondly, 26% then wanted to show how family wealth could be used for a positive impact, that idea of again that responsibility but actually linking back to family values and thinking about the role that they wanted to play.

And then the third was really closely followed by, 24% said incorporating sustainability would lead to better investment outcomes. And I think in those three answers you really see responsibility, connection to the family, and family outcomes as the summary as to why we're seeing that increase in investor demand.

HP: So how has the coronavirus specifically affected interest in the sustainable investing environment?

DP: Two ways really. Financially, given the market volatility this year that you've just been talking about, sustainable investing has clearly passed its first test and then I think personally, the pandemic has reminded people, especially older wealth holders, about the fragility of life really causing them to re-evaluate their portfolios and their priorities.

Now, for years we've had first-hand investor experience of performance and we've even had academic and industry research to demonstrate the equivalence or the benefits of sustainable investing. But I think really when investors saw the outperformance of sustainable funds, especially when they compared them to their own portfolios earlier this year, then sceptics started to convert.

When we go back to the survey, that's why two thirds said that they were looking to widen their risk assessment to include more non-financial, the environmental social and governance factors, into their investment decisions. Or 69% said how companies behave during the pandemic would really determine their attractiveness afterwards.

Now I will actually just say that just because the composite or paired indices outperformed, doesn't mean any investor or house means who has said they are investing responsibly or sustainably will outperform.

Like most things, there's a difference between doing something and doing it well. Now just to go to the second point I think on the personal level you know clearly most of our focus has been helping clients safely navigate their lives and their portfolios through the disruptions of 2020.

I think we've had more discussions than ever at the same time about the longer term, about those questions of how a family’s wealth can reflect more of their values, the role that they want their wealth to play in society and what opportunities they have to address the urgent social and environmental issues we face, and I think especially when it comes to intergenerational wealth transfer.

And I think if the pandemic is serving as a catalyst for people to reflect on their lives and portfolios, sustainable investing is the way for them to express those views.

HP: Thank you. With the majority of the focus on the pandemic, as we know, and the economic implications, does climate change really still matter at the moment Damian?

DP: Initially our special focus was only on climate change and we were going to go live with this survey in March but we paused it to develop and then include a number of questions about the pandemic.

So what's fascinating is, even though we gathered respondents’ ideas and views amidst the initial peak of the pandemic, half of those respondents agree that climate change was the greatest threat to the world today, and in fact 83% were still even more concerned about the physical effects that we're seeing and have continued to see even after the survey.

So, for our investors, we see both risks and opportunities in terms of the sectors, in terms of the current holdings and I think what we're recognising is that with climate change and the climate breakdown that we're seeing, if we're thinking about positioning our portfolios in relation to the pandemic had we known what was going to happen, I think we would have positioned them differently.

In relation to climate change we know what's going to happen and therefore for our clients what we're really thinking about is how do we help them to position. How do things like carbon foot printing help them to identify those risks.

It was interesting that was one of the questions we asked this year. You know, 81% didn't know or weren't sure about their carbon footprint and only one in five did, but more importantly I think 40% who didn't know their carbon footprint wanted to know it in order to inform future investment decisions.

And this links to why our portfolio managers, especially the equities team, have been diving into the detail of carbon foot printing on a portfolio level and a company level, and how the fundamental analysis of what they're doing around companies is showing carbon risk coming to the fore.

Now clearly this is in the carbon intensive industries, but we're seeing how direct carbon risk applies across most companies in most industries, where transition risk add complexity and cost to ability of companies to generate free cash flows.

And I think that's also why on the other hand we’re seeing green stimulus, that we've been talking about coming from governments also affecting different industries. And throughout the year we've obviously been publishing monthly market perspectives on the topic, exploring physical and transition risks, attractiveness of fossil fuel companies.

And just to turn back to the report just to finish, it was fascinating 87% of respondents believe that climate change has either a partial or direct impact on their portfolios, which is a substantial number of these individuals. And really I think as one of the family offices said it's unfortunate in some ways the reason why this market is growing is because of things like climate change.

HP: Thank you my final question for you today, is to investors who are very much interested in this what's the best way that they can get started?

DP: We usually think about 3 three sort of stages. One is educate, the second is articulate, and the third is execute.

So education is really just getting familiar with the field and I spend a lot of time sitting down and it’s why we've been publishing on the topic and sharing insight around all of our client events, around what is this. How do you demystify some of the concerns that people have or how do you clarify some of the language?

I think the second stage that articulation stage, is actually really fascinating when you're sitting down with the family and being part of those conversations, helping them in different generations to articulate what it is that they want from their portfolio.

It could be an older generation who's thinking about the legacy that they're leaving or whether or not their kids are ready to inherit the wealth that they will be transferring, or it could be a younger generation who’s saying we want to be more actively involved with the family wealth and we're really passionate about a topic so this is an opportunity for us.

Or even family businesses and saying well what are the risks or how do we diversify around family business and be able to think about how do we take it forward. And that conversation I think we're having more and more with clients, especially the family offices or through family offices and helping those family offices to have that conversation is this second stage.

And then obviously the execution. Finding high quality opportunities is really important to do. We still have a great view of the market given where we sit, but actually being able to make sure that those fit into your portfolio.

This is not something that you have to do overnight, you don't have to go from a non-impact or sustainable portfolio today, 100% tomorrow. All of these things we really see as getting phased and started is the most important thing.

HP: Well thank you Damian. I think it's fair to say that impact investing has structurally changed the wealth management industry and will continue to do so over the course of the next decade.

Let's move onto the week ahead. PMI reports will provide a clue to the shape of the recovery. October's flash manufacturing and services purchasing managers’ indexes in the Eurozone, UK, and the United States will help to gauge the continuing effect of the pandemic on economic activity. Services as we know have been much harder hit by the COVID crisis, with services in the Eurozone actually contracting during the course of September.

Composite output in all three regions are expanding, with weakness in services supported by strong manufacturing performance. In the UK, Brexit talks will continue. We still think a deal is achievable, we perhaps even go as far as saying likely, but by no means inevitable. On the data front, investors will focus on retail sales and inflation figures.

September UK retail sales data will signal the health of the consumer. Retail sales have been positive, with August the fourth consecutive month-on-month growth, but the magnitude of that growth has been declining. Against the backdrop of suppressed economic activity, inflation rates remain generally subdued. Wednesday’s September CPI data for the UK will likely confirm this.

We project headline inflation to come in at just 1% year-on-year, core inflation to print higher at 1.8%. Finishing off with China, on Tuesday we and the consensus expect the People's Bank of China to keep the policy rate unchanged at 3.85%.

With that, we'd like to thank you for once again joining us. We hope that you found this podcast interesting, informative, and it’s given you a guide as to how you should be thinking about your portfolio from an impact investment perspective. We will be back next week with our latest instalment, but for now, may I wish you every success for the trading week ahead.