Markets Weekly podcast – 17 April 2023

Henk Potts: Hello. It’s Monday, 17th April 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. 

Firstly, I’ll analyse the events that moved the markets and grabbed the headlines over the course of the past week. We will then discuss the recently published Barclays 2030 Thematic Roadmap. And finally, I’ll conclude by previewing the major events and data releases that are likely to shape the week ahead. 

Hopes that the most aggressive hiking cycle since the 1980s is close to being concluded helped to boost risk sentiment last week, though markets are still debating how quickly the tightening process will be completed and when the pivot to an easing stance will happen. That debate is keeping equity markets in a relatively tight range.

In terms of equity market performance, the STOXX 600 rose 1.7% last week. European stocks have now notched up their longest winning streak since December, racking up four weeks of gains. In the US, the benchmark S&P 500 rose eight-tenths of 1% over the course of the week. 

Alongside the macro environment, investors are also keeping a close eye on first-quarter earnings. The season got off to a positive start on Friday with the US banks, consensus-beating numbers from JP Morgan, Wells Fargo and Citigroup.

In Europe, shares in the luxury goods sector rallied following upbeat numbers from LVMH and Hermes, as Chinese shoppers used their new-found freedom to splash out.

So, what can we expect more broadly from the earnings season? Well, the S&P 500 analysts are forecasting that Q1 earnings will decline 6.5%, that’s according to FactSet data, which would represent the largest decline since the second quarter of 2020, and the second contraction in a row. However, Q1 could prove to be the bottom of the cycle, with signs that margins are finally starting to stabilise, helped by cost cuts. Therefore, the outlook statements are likely to be as important as the published numbers.

On the macro front, the US inflation report supported the view that price pressures are moderating at the expected rate. Headline CPI for March came in at one-tenth of 1% month on month, and 5% year on year, substantially lower than the 6% registered in February.

Inflation has now decelerated for nine consecutive months and is back to its lowest level since October 2021. The easing of inflationary pressures was driven by base effects and lower energy prices. In fact, the biggest downside surprise came from the slowing of food inflation, which appears to finally be reflecting lower commodity prices. 

However, core CPI remained robust, up four-tenths of 1% month on month, 5.6% year on year, suggesting it’s simply too early for the Federal Reserve to pronounce victory over the battle with inflation and adds to the evidence, along with the tight labour market, that the US central bank will opt for a further 25-basis point hike at the May FOMC meeting, but that may well prove to be the last in this hiking cycle.

In terms of the outlook for policy beyond that, we do see the potential for the Fed to pivot to an easing stance in 2024, as inflation continues to moderate, labour markets continue to cool and growth weakens. We currently predict that the target range for fed funds rate at the end of 2024 will be 3.5% to 3.75%.

Whilst the rest of the world has been preoccupied by surging inflationary pressures, price rises in China still remain elusive. China’s CPI eased for a second straight month in March, showing just 0.7% year on year. That compares to 1% in February and the lowest print since September 2021, driven by declining transportation and food costs.

Goods inflation fell back as consumers continued to shy away from big-ticket purchases, although improving demand pushed up services inflation.

On the producer side, deflation widened for a third straight month, to minus 2.5%, due to high base levels and lower energy prices. As a result, we have lowered our inflation forecast for China to 2%, that’s for this year and for next year, which is below the official target of 3%, which could give policymakers greater scope to support the recovery.

So far, authorities are focused on boosting the flow of credit to the real economy, reducing the reserve requirement ratio and frontloading infrastructure investment. Calls for a policy rate cut have been growing louder on the back of the benign inflation outlook. China still looks set for a strong recovery during the course of this year as the economy reopens, pent up demand is unleashed and policy remains supportive.

We’ve raised our 2023 growth forecast to 5.6%. That’s comfortably above the modest 5% official target, which should be positive for investors in the region and, indeed, for global growth prospects.

Beyond the inflation prints, the other big data release came in the form of US March retail sales. The US consumer, we should remember, has been very resilient so far during the course of this downturn, been helped by excess savings built up during the course of the pandemic, low rates of unemployment and wage growth.

There are now signs that consumers may be just becoming a little bit more cautious. Retail sales fell for a second straight month in March, with the value of purchases dropping 1% following a 0.2% decline in February. Consensus is expected to decline, but only half of 1%. 

I think that given the clear economic uncertainty, the stress that we see on purchasing power and the forecast in moderate increase in unemployment, we would expect private consumption growth to materially weaken over the course of the next year. 

For 2023, we still think it’s going to be positive with household demand growth of 1.7%, much less than that 2.8% increase that we saw in 2022. And, given the fact that private consumption counts for around 70% of activity, that will inevitably weigh, I think, on growth prospects during the course of this year and next.

So, that’s the global economy and financial markets last week. In order to discuss the recently published fourth edition of Barclays Investment Bank’s 2030 Thematic Roadmap, I’m pleased to be joined by Hiral Patel. She’s Global Head of Sustainable Thematic Investing for Barclays Investment Bank.

The theme of the report this time around is on human security, where the team argues the 21st century has brought new challenges and dimensions to our understanding of human security, including natural disasters, violent conflicts, climate change, health pandemics and resource scarcity.

Hiral, great to have you with us today. Firstly, what is the 2030 Thematic Roadmap?

Hiral Patel: Thanks, Henk. So, our 2030 Thematic Roadmap outlines 150 trends that we believe dominate our discussions with investors when investing for the next decade. Now, this includes trends across technology, industrials, consumer, healthcare, energy and the environment.

Of course, we leveraged the expertise of our sector analysts, but we also utilised a wide range of datasets so that we can consider the trends that could potentially impact investment decisions. 

We rank each of the 150 trends based on our impact-versus-likelihood methodology. And that is really so that we can answer to what extent do we believe these trends are likely to impact society by 2030, given some may be influenced by external factors such as inflation, consumer adoption and pricing?

Like you mentioned, we do update the roadmap on a yearly basis, with trends moving up or down based on our analysis of a variety of datasets relating to patterns, hiring, M&A and private funding.

Now, in addition to looking at, I guess, the underlying data, we do like to spice things up each year by taking a particular focus to each edition to reflect the investor sentiment. So, relative to edition 2, where we focused on the post-pandemic world, or edition 3, where we focused on digital sustainability, this year, in edition 4, we focused on human security to reflect increased focus on geopolitics and macroeconomic volatility by the investment community.

Henk Potts: Well, thank you for setting the backdrop and explaining the parameters in which the report is developed. As you’ve mentioned, the overarching theme for this year’s roadmap update was addressing human security. What do you really mean by this, and how did this impact your view on which trends to invest in?

Hiral Patel: Timing wise, this year’s update was by far the most interesting to collate given the broader macroeconomic environment. Clearly, the 21st century has brought new challenging dimensions to our understanding of human security. This includes natural disasters, violent conflicts, climate change, health pandemics and resource scarcity.

The challenge is that many of these global risks have been further compounded in the last 12 months by heightened geopolitical tensions, which leaves us more cautious on the near-term outlook for many of our emerging trends.

In particular, we see additional investment trends emerging which may cause some of our trends to slow down. In particular, we see domestic resilience and protectionist measures being prioritised ahead of sustainability and international co-operation.

In some instances, Henk, we do see the need to reprioritise trends relating to critical infrastructure and social progress. And, thus, within the roadmap, we’ve revised the positioning of several trends, including a more positive view on things like battery technology, energy storage, cybersecurity and electronic waste.

Now, taking a step back, I acknowledge that human security is a very broad concept. One area to call out would be the trends relating to food security. Of course, we remain very supportive of emerging innovation relating to alternative proteins, drones, robotics or farm-management software in the long term. 

However, in the near term we do see the need for thematic investors to consider the need to go back to basics by considering the more fundamental drivers of agriculture. So, this includes reassessing the role of fertilisers, investing in logistics relating to shipping and rail networks, or even repurposing existing supply-chain efficiencies relating to food waste.

I guess the key thematic wildcard in any of this discussion relating to food security remains the degree to which we can leverage biotech in the future. And this is a very ‘Marmite’ topic where we’re considering the future of genetic engineering and synthetic biology, and it will be an interesting space to follow from a regulatory perspective.

Henk Potts: Well, it’s certainly interesting to hear some of those development areas. Let’s try and go beyond the broader macroeconomic environment. Are there any specific catalysts or drivers to consider for 2023 within thematic investing?

Hiral Patel: There are multiple catalysts impacting our 2023 roadmap this year, so it’s definitely keeping us busy. The obvious elephant in the room is really to what extent will the US IRA and the European green industrial plan impact trends focused on the scaling of the technologies that we believe are critical to the decarbonisation pathway.

I guess beyond the ongoing discussion relating to renewables or the future of nuclear, the one area which I think is extremely topical at the moment is the role of the critical or the rare earth materials, essentially, the metals that are needed for the clean-tech transition. So, this includes lithium, cobalt or nickel, and this is not just for easy adoption but it’s also needed for areas like solar panels or fuel cells, going forwards.

Now, from an investment perspective, the US IRA and the European GDIP have both signalled the need to foster domestic recycling where possible and also the increased use of recycled content. The future of battery recycling, in my view, will be an interesting area to watch given the various types of technologies that exist, all of them trying to improve recycling yields in a more scalable way to deal with that upcoming tsunami of batteries that are expected by the end of the decade, but, more importantly, in the most financially viable way.

I guess one thing to quickly add beyond just the US IRA and European GDIP, there are various other catalysts that are also influencing thematic investing. We have the upcoming biodiversity framework later this year, which will further support the focus on natural capital investments, and this would support trends focused on regenerative farming or agriculture tech, for example.

Henk Potts: Well, there’s certainly no doubt that the clean technology transition is an area that investors will continue to focus on over the course of next year and beyond. Hiral, within this annual update you also add and remove trends based on your analysis of the underlying data. Did anything really surprise you this year?

Hiral Patel: Oh, the million-dollar question, Henk. So, we added six new trends to the roadmap this year, with our focus on human security capturing trends that perhaps are supporting more resilient supply chains. 

For example, we added a trend called a trade tech, targeting investments relating to predictive maintenance, real-time tracking in inventory, smart billing and even blockchain-powered documentation of shipment or transaction records relating to the price and location, and even the quality, of goods, all of which, I guess, address greater supply-chain transparency, improved risk management and greater efficiency.

Similarly, we also wanted to reflect the push towards self-sufficiency within digital and energy infrastructure, and, thus, we added semiconductors 3.0 as a trend to our roadmap this year.

Now, this semiconductors trend captures the long-term developments relating to, I guess, the experimentation of alternative semiconductor materials or the change in manufacturing techniques. And, more importantly, the regional diversification in semiconductor manufacturing, where India, for example, could be a long-term beneficiary.

One more thing would be that we also continue to monitor VC funding and here is where we see favourable developments in trends aiming to disrupt traditional industries, such as law or insurance, which supported our decision to add big trends like legal tech and so-called insure tech to our roadmap. 

The interesting thing here is that we’ve been monitoring both of those trends for some time but see greater potential in insure tech within our 2030 timeframe, given the increased use of AI and alternative data, which is likely to spur traditional insurance companies to evolve their product offering.

Henk Potts: OK. Let’s try and bring this all together and get a little bit more practical. How can investors differentiate, and are there certain areas you seen gaining traction more than others?

Hiral Patel: Within thematic investing, I guess, investors are either focused on strategies relating to energy, given I guess the broader push to decarbonise society as quickly as possible, or they’re focused on digital to leverage the growth of new technologies, such as robotics, AI, or blockchain, for example.

In our view, an area that is gaining traction is social investing. By this, I mean investing in trends that enable the advancement of society, including areas like digital access, financial inclusion or even healthcare equity. 

Now, investing in social outcomes is always going to be hard to measure or target with sufficient precision, especially when I compared it to other areas, like energy or digital. But, we’ve seen several funds emerge in the last 12 months targeting healthy aging or social inclusion to, I guess, address this gap in the market.

More broadly, we’ve also seen ongoing developments relating to the EU social taxonomy, which will continue to support this focus by the investment community on social investing. And, I guess, on the private side, there has been incredible growth in SDGs, so United Nations Sustainable Development Goal Strategies, which have also supported the growth in social investing.

Now, beyond social investing, I guess if I could squeeze a few more ideas in, we just had the UN conference on water in March in New York. This was the first time in nearly 40 years that the UN has come together to discuss water. I couldn’t believe it. But this could support renewed interest in our water-management trends, where we see opportunities in irrigation and waste-water treatment becoming more topical.

Now, taking a step back, I guess, whether it’s social investing, whether it’s investing in water, one of the consistent takeaways I would emphasise across all of the 150 trends is the need for the investment community to really challenge the companies, whether it’s on the public side or even on the private side, on their impact measurement so we know what transition milestones are being met as trends mature and hopefully become more scalable over the coming years.

Henk Potts: Well, thank you, Hiral, for sharing your insight today. It’s really interesting to discuss the findings of the report and, of course, the implications for investors. We’ll certainly be watching those big trends over the course of the coming months and years.

Let’s now move on to the week ahead where the focus will be on the UK inflation and employment data. We expect March CPI to decelerate from the 10.4% that was registered in February, but remain in double digits at 10% in March, driven by an acceleration in food and services price pressures, but offset by a deceleration in goods and energy.

In terms of the labour markets, we look for UK unemployment to move sideways at 3.7%. We look for wage growth to soften to 5% year on year, with the public sector likely to outperform the private sector earnings once again.

In the US, on Thursday, we forecast that existing home sales will increase four-tenths of 1% in March, coming in at 4.6 million units. We see the pickup in sales in February as having continued into March, after bottoming in January to a lower level than during the height of the pandemic. So, watch out for those figures at the end of the week.

But with that, I’d like to thank you once again for joining us. I hope that you’ve found this update interesting. We will, of course, be back next week with our next instalment. But, for now, may I wish you every success in the trading week ahead.