Markets Weekly podcast - 25 January 2021

Henk Potts (HP): Hello it’s Monday the 25th of January and welcome to the Barclays Private Bank Markets Weekly podcast, the recording that will guide you through the turmoil of the global economy and financial markets.

My name is Henk Potts, Market Strategist with Barclays Private Bank, and each week I'll be joined by guests to discuss both risks and opportunities for investors.

This recording will last around 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 on to 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, he's Head of Impact Investing for Barclays Private Bank.

We will discuss the impact the new Biden administration will have on the green agenda and sustainability, and what opportunities may emerge from that for investors. And finally, I'll conclude by previewing the major events and data releases that are likely to shape the week ahead.

Let's start with markets from last week. US equities notched up another week of impressive gains as investors warmed to the prospect of an aggressive spending Biden administration.

Markets, I think, were also buoyed by a confirmation hearing for Janet Yellen as Treasury Secretary and the fourth quarter earnings season. In terms of equity performance Wall Street powered ahead, S&P 500 was up 2.1%, its biggest weekly advance since the end of November.

In Europe, stocks were under a little bit of pressure towards the end of the week. We had record daily deaths registered in Germany and the UK and warnings of lockdown extensions across a number of European countries.

Alongside that, PMI (Purchasing Managers’ Index) data showed that services remained in contraction within the eurozone and that all held back equity markets. STOXX 600 was only up 0.2% over the course of the week.

As we saw Joe Biden formally became 46^th President United States on Wednesday, ushering in a new era of politics that will have ramifications for both domestic policy and international relations.

Lowering the rate of infections and fatalities, delivering the vaccine, providing virus related assistance, and of course transitioning to a post-COVID return to society is the number one priority for the new President.

It will occupy, we think, the majority of the first half of this year. But investors are also trying to assess how much of that $1.9 trillion proposed stimulus package will be approved by lawmakers and the impact it will have on immediate growth prospects.

The economic element to the stimulus package, of course, aims to boost consumption but also provides support for low paid workers, small businesses, and state services. What does that mean in terms of the growth outlook?

The aggressive stimulus package will support immediate growth prospects. We anticipate it will temporarily supplement income and government spending while the economy is being weighed down by the pandemic.

The speeding up of the vaccine roll out should also reduce new coronavirus cases and help to revive service industries that are particularly sensitive to social distancing, and we think it will help restore employment back to pre-pandemic levels.

We now anticipate the US economy will grow somewhere around 6.3% during the course of this year. The unemployment rate in the United States we think will be back to 4% at the end of the year.

Janet Yellen testified before the Senate Finance Committee. Market sentiment around her appointment certainly seems positive, she is seen as a safe and experienced pair of hands. She's been advocating the need for additional stimulus and she maintained that message saying the US must ‘act big’ to revive the economy.

She pushed back against fears that the administration would seek to aggressively hike corporate taxes but did indicate the need for federal debt to be put back on a sustainable path, but only going as far as saying eventually.

Perhaps most comforting for markets is the fact that she's expected to provide much greater levels of coordination between the Federal Reserve and the Treasury.

We’re in the heart of the fourth quarter earnings season. Investors are certainly watching that very carefully indeed. So what have we seen from the scorecard so far?

Well, according to data from Refinitiv, 66 of the S&P 500 companies have reported: 88% have beaten analysts’ earnings estimates, 79% have beaten on the revenue side. That's well above the long term average.

We know the US banks have led the early reporting - what have we learned from those numbers? Well, they show robust fourth quarter figures helped by a surge in revenue of trading divisions, particularly equities, that benefited from the wild volatility created by the pandemic and of course the unprecedented central bank action.

Investment banking revenues have also been jumping as banks were called in to help companies raise debt and equity as well as advice on merger and acquisition deals. Other features of bank reporting include increasingly releasing reserves set aside for credit losses. Loan delinquencies have remained significantly below the dire forecasts at the start of the pandemic. There are signs that household spending has been picking up over the course of the past quarter but loan growth has been lacklustre and expected to remain so in the coming months.

What's the outlook for the US banking system? Well trading desks, no doubt, have benefited from this almost perfect storm that's unlikely to be repeated. Future fortunes will be determined by the speed of the recovery and the path of policy normalisation.

And actually if you look at market reaction despite the stellar figures from the US banking stocks, they have not been powering ahead. Market anticipates that many of the factors that helped those surging revenues have been driven by one-off factors and we should remember of course US banking stocks performed well coming into the reporting season.

This week will be another important week for fourth quarter earnings. 113 S&P 500 index members will report this week, including heavyweights Facebook, Apple, and Tesla.

Moving onto the European Central Bank. No surprise they kept the deposit rate at -0.5% and maintained its bond purchases. But the European Central Bank President Christine Lagarde warned eurozone growth is expected to have contracted in Q4, and is on track for its first double dip recession in nearly a decade.

In terms of the outlook, inflation was negative for the fifth consecutive month in December. Beyond base effects and technical factors, particularly the likes of higher energy prices, a reversal of Germany’s VAT cut, lacklustre demand, and labour market weakness is likely to anchor inflation down at depressed levels.

We think eurozone CPI will average just 0.8% during the course of this year. What does that mean in terms of policy?

Well we expect the European Central Bank to keep the deposit rate at that minus 0.5% for the next two years. The bank’s focus is instead expected to remain on liquidity support.

With the limited policy options available I think to the European Central Bank they'll struggle to reflate the economy and to stimulate the growth that’s required. This burden I think increasingly will sit squarely with fiscal policymakers.

So that was markets at the end of last week in the global economy.

Let's move on to our focus section. Damian, good to have you with us today. We have a new administration in the United States and one which you could say is in stark contrast to the previous one on a range of issues, perhaps most noticeably when it comes to the issue of climate change.

So Damian, what changes can we expect from President Biden?

Damian Payiatakis (DP): Thanks Henk, pleasure to be here. I would say we really nearly have 180-degree reversal, both in terms of perspective and in policy.

During the campaign Biden talked about climate change as an existential threat, using that term and really linked its toll both to the environment but also to vulnerable Americans in terms of their jobs and the impact that it has disproportionately on them.

Now, given the pandemic's economic implications he also framed addressing climate change as a way to grow jobs through better green infrastructure. So the ambition now is substantial with an attempt to make an aggressive shift to clean energy, to have the US carbon neutral by the middle of the century, and by using massive federal investment to drive these changes within the pandemic support package.

Now, many of Trump's rollbacks themselves we are expecting to be rolled back going forward and also moreover the appointees that he had put in place in many of the federal agencies.

So I think whether we see, he being able to deliver on these ambitions, given realistically the slimmest of margins in Congress and also a very heavily conservative judiciary I think remains to be seen, but when we look at it among the Coronavirus pandemic, the economic recovery, and racial inequality, climate change is one of the four stated policies that the Biden administration has.

HP: After being sworn in, Damian, one of the first things that President Biden did was to sign back up to the Paris Accord. How significant in your view is that decision?

DP: Well, re-joining the Paris Accords was one of those campaign promises that he made, and he delivered it on his first day. However, the act of re-joining itself is primarily symbolic.

In some ways, resigning only gets the US back to where it was four years ago and at that point realistically the US greenhouse gas emissions were flat and the country wasn't on track to meet its Paris commitments. And so, that commitment on an international level is not that significant.

What does make a difference are the commitments that are called Nationally Determined Contributions, NDC's, which are really where the committed targets of each country that they make to lower their national emissions by a certain date.

So 2020, this last year, was supposed to be both the COP 26 conference where countries reported on their progress towards their targets and also set the next five years of targets that they were going to commit to.

Now, as of earlier this month, only about 23 countries had reported on their progress and their next set, but given the US's withdrawal and obviously lack of nationally driven activity there hasn't been much national progress over the last four years.

So, when we think about the US signing back up it's not the signing up that's going to make a difference, it's really the hard part of figuring out what the new target is going to be and how much US greenhouse gas emissions have to be reduced over time.

And realistically when we think about it, if the slope of change downward was at one level we know that the downward trajectory in order to meet the new targets is going to be much, much steeper than it was before.

And I think that's really going to be where we see the implications, when we see what the US's national determined contributions the NDCs are that they commit to, and thereafter how they're going to implement and progress those.

And it's a fine line because the Biden administration has to both be sufficiently ambitious to satisfy, at least to some degree, some of the domestic green groups that he has in the US as well as the international community, at the same time finding a way to navigate through the challenges that he has from a political and governmental perspective.

HP: Understood. So what other areas of the green agenda can we expect the President really to focus on over the course of next few months, perhaps even years?

DP: Well the biggest aspects of Biden’s campaign plan were threefold. One was to create a net zero emissions economy by 2050, the second was to decarbonize American electricity in the next 15 years, and lastly to deliver that with a $2 trillion green plan.

And realistically thus far we can only refer to these as part of his campaign not to suggest predictions because obviously the reality of what he's able to do will be dependent upon the national agenda and his ability to work within the system.

I think we are expecting really changes to be driven in three categories: one is executive orders, second is the economic stimulus and third is that international engagement, back to the Paris accords.

The executive orders are really interesting because to begin with he's going to rescind many of the orders that Trump put into place, in fact at one point somebody was calculating over 120 executive orders that really were degradating the American efforts to meet climate agenda and also general environmental - everything from promoting fossil fuels to tightening limits on methane emissions to raising fuel economy standards for motor vehicles.

Now we're expecting a lot of those things to be reversed, rolled back, those rollbacks in the next 100 days and even more so thinking about well what are the new options that he has from an executive order perspective around things like consumer goods or electrical vehicle purchases or promoting energy from new renewable energy sources.

Now, the most promising and interesting one is actually a very minor one that actually probably won't get a lot of attention, which is something called the social cost of carbon.

Now, very simply, it's really the figure that the government uses to calculate to account for the damage caused by increasing average global temperatures, and if I oversimplify even more if you think about it a bit like a discount rate in terms of calculations it makes a significant difference as we always know in terms of what the outcome ends up being.

So currently it's about $1 per tonne of carbon. If we just go back to where the Obama administration, it rises to about $50 per tonne and it's possible and in fact arguably sometimes may be necessary to raise that to meet the commitments that are going to be coming out to about $100 a tonne.

Now that is a massive difference when you think about discount rates in terms of what a calculation about whether or not projects are going to be approved or where standards have to be set for companies.

Now secondly, this is a stimulus. Obviously we talked a little bit about that stimulus thinking about that $2 trillion that again, that estimate of what would be needed to achieve the ambitions that they have.

Now, everything in that green growth plan around new infrastructure for cars, new jobs around silver installations, many of these things are going to have a massive flow of capital into them as a result of them.

And if the Democrats use rather than a global climate package the expectation is putting it into individual stimulus packages, then there's going to be potential for it actually to make it through.

Now again, it will not be the easiest thing to achieve but there is a potential and obviously that has massive implications of where we see some of these industries being accelerated their growth capital.

And then lastly just going back to that international engagement.

By re-joining and taking a role at the table again, the US itself isn't going to drive anything but collectively when you think about the commitments and the both the two-degree target and the 1.5-degree ambition, by having the US back at the table, that actually accelerates a lot of the change globally around some of the sectors that we've been talking about for a while.

HP: So you've outlined a radical agenda. If and when these elements are fully implemented, what implications would they have for investors?

DP: Well, as ever its risks and opportunities for investors and throughout 2020 in our market perspectives monthly's we were talking about those risks and opportunities.

In particular, I would focus on the physical risks we talked about, sort of where hurricanes or damages are going to come, but moreover actually the transition risks.

This is where we talk about policy risk being the inevitable policy implications of governments committing to move these things forward.

And thinking about that for investors the companies that are most at risk be it given their carbon footprint or the carbon contribution they are making are very clearly the ones that we always are familiar with.

But actually in our outlook 2020 we identified three themes where we saw there being opportunities for investors to get involved. So addressing climate change from energy in terms of clean energy needs and through improved efficiency of things like buildings and production of steel or other industrials.

Secondly is thinking about environmental footprint and reducing that through sustainable cities or through circular economy activities. And lastly, conserving biodiversity and ecological systems, really protecting and restoring the natural capital biodiversity that we have and moreover thinking about sustainable agriculture and food.

All of these together provide a nice wide range of potential entry points for investors to get involved in thinking about where can we put capital to use for growth potential, but also to help solve some of these large scale problems that we have.

HP: So my final question to you today Damian is a short but it's an important one. Is it too late to save the planet?

DP: Definitely not too late to try and I think it's a bit of a self-fulfilling prophecy, you know, the reality is from a physical perspective things are likely to get worse before they get better but from an investor perspective this is the opportune time to start thinking about how do you get engaged, understand the risks in your portfolio and actually identify and put money to work in terms of some of the opportunities.

So without a doubt I think collectively, right this is a systemic problem, I think collectively people playing their roles can give us that chance and I think it's a good one and actually an improved one now.

HP: Well thanks Damian for your thoughts today. It'll certainly be interesting to see how quickly the new administration implements the changes and how the opportunities for investors will evolve.

Let's move on to the week ahead. Wednesday's Federal Reserve meeting is likely to capture investors’ attention. Given the agreement on fiscal stimulus, successful Brexit negotiation, and the Senate elections in Georgia, we expect the Fed to retain its current policy stance as it assesses the effects of the vaccine on the pandemic.

Moving onto the UK, the unemployment rate has remained fairly low while furloughed workers are classed as employed. The extension of the furlough scheme until the end of April should keep the UK unemployment rate fairly stable until then.

Therefore, Tuesday’s November data is unlikely to show a great change in unemployment, although we do expect a small uptick from 4.9% in October to around 5.1%. Thursday's advanced fourth quarter GDP data for the United States will give us an indication of the economic performance coming into 2021.

Of course that's after the impressive 33.4% growth rate we saw in the third quarter, but given the disruption caused by COVID in the final three months of the year and the delay in passing further stimulus we expect to see moderate growth, coming in somewhere around 4.4%.

With that I’d like thank you once again for joining us. We hope that you found this podcast interesting, informative and its provided you with some details about the important role the new administration will have in dealing with the challenge of climate change.

We will be back next week with our latest instalment but for now may I wish you every success in the trading week ahead.