Markets Weekly podcast – 23 January 2023

Henk Potts (HP): Hello. It’s Monday, 23rd 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. 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’ll then discuss the findings and the ramifications of the latest global impact report. And finally, I’ll conclude by previewing the major events and data releases that are likely to shape the week ahead. 

Falling consumer demand, mixed earnings and double-digit UK inflation dampened some of the bullish recovery sentiment that’s been driving equity markets higher since the start of the year last week. The rapid rally ran out of a little bit of steam as investors questioned how soft the economic landing will be as data continues to deteriorate.

The S&P 500 fell seven-tenths of 1% over the course of the week, though the benchmark index is still up 3.5% during the course of this month. The STOXX 600 was unchanged over the course of the week. European stocks were up 6.4% year-to-date, an impressive performance. That’s on hopes of a much shallower eurozone recession than was originally feared, helped, of course, by less impact from the energy crisis and the opening of China.

In terms of bond markets, Treasury yields notched up a third straight week of declines as investors assessed moderating US inflation, cooling economic data and a downshift in sentiment from Fed officials. Fed fund futures now suggest there’s a 99.2% probability the US central bank will slow the pace of the next interest-rate increase to 25 basis points (bp). Remember, the next meeting is on 1st February.

Ten-year Treasury yields finished the week around 3.5%. Crude prices posted a gain for a second straight week, as traders start to price in the expected recovery in demand from China as the economy reopened and activity recovered. The International Energy Agency said the ending of COVID restrictions in the world’s second-largest economy could result in record demand for oil during the course of this year. Brent rose 2.8% last week to just under $88 a barrel this morning.

In terms of the outlook for markets, corporate results, of course, will remain in focus. The earnings season will continue this week with a further 93 S&P 500 companies reporting fourth-quarter results. Eleven percent of S&P 500 companies have already delivered their latest figures. So far, 67% of companies have reported earnings per share above estimates, which is below the five- and 10-year averages, according to FactSet data.

The blended earnings forecast now stands at minus 4.6%, with financials being revised down over the course of the past week. If the final earnings tally does work out to be -4.6%, that would represent the first year-on-year decrease in earnings since the height of the pandemic in the third quarter of 2020.

Revenue growth expectations have eased but remain positive at 3.7%. Tech earnings will be grabbing the headlines this week with results of Microsoft, IBM and Intel due. Analysts are forecasting a 9.1% decline in fourth-quarter earnings for the US technology sector, according to IBIS data.

On the macro side, there were further signals that the multitude of pressures on consumers are moderating, demand with retail sales in the US and the UK both declining. UK retail sales slumped in December, the volume of goods purchased in shops and online fell 5.8% year-on-year, worse than the 4% fall economists had expected, the sharpest December decline since 1997. If you exclude fuel, sales fell 6.1%. That’s the most since records began in 1989.

In the US, retail sales fell by the most in a year last month. The value of overall retail purchases decreased 1.1% after a downwardly revised 1% drop in November. We should remember these US figures aren’t adjusted for inflation. Ten of the 13 retail categories fell, including motor vehicles, furniture and personal care stores. 

Pressure on real disposable incomes from elevated levels of inflation and higher interest rates are expected to materially weaken private consumption growth during the course of this year on both sides of the Atlantic.

Alongside the retail sales figures, there was plenty of other data for the Bank of England to digest over the course of the past week, with figures showing labour markets still remain very tight and inflation continues to hover in double-digit territory. 

UK unemployment held close to its historically low level of 3.7%, as inactivity remains high due to lower levels of participation from the over-50s and ongoing elevated levels of sickness. Supply of labour continues to be a major problem for many UK businesses due to the combined impact of COVID and Brexit. Vacancy rates have only slowly been moderating from record highs, but still remain above that one-million mark.

Meanwhile, strike action led to 467,000 working days lost in November, a significant increase on the 38,000 monthly average between 2010 and 2020. The tight labour market has generated strong wage growth. It was up 6.4% year-on-year. That’s in the quarter to the end of November, although real wages, so adjusted for inflation, fell 2.6%.

Speaking to UK inflation, well, price pressures remained elevated, headline CPI is printing at 10.5% year-on-year. Core inflation came in slightly above expectations at 6.3%.

In terms of the breakdown, well, as we’ve been talking about, wage growth, along with services inflation, provided the upward momentum, whilst falling petrol and diesel prices created downward pressure. 

UK inflation is forecast to moderate at a slower pace than other advanced economies due to the impact of higher energy bills, lower levels of government assistance and the ongoing disruption to the supply of labour and goods. We forecast UK CPI will average 7.3% during the course of this year. 

The strong wages and robust inflation data certainly adds to the evidence the Bank of England will still need to raise rates aggressively. We look for a further 100bp between now and May, pushing the UK base rate up to 4.5%.

So, that was the global economy and financial markets last week. Now in its ninth year, the Investing for Global Impact report provides unique insight into the attitudes and actions of the world’s wealthiest individuals, families, family offices and their foundations when it comes to generating positive impact with their capital. It’s the leading global benchmark for those interested in impact investing and philanthropy. Data for this study was collected from nearly 150 respondents from 35 countries with an average of $730 million of assets under management.

Here with me today is Damian Payiatakis, our Head of Sustainable and Impact Investing, to highlight some of the key findings of the report. 

Damian, great to have you with us today. Let’s get straight into it. What stands out for you in this year’s report?

Damian Payiatakis (DP): Great to be here, Henk. Undoubtedly, the rate of change has decreased from prior years. However, what we really do see is the growth of sustainable investing continues onward. Let’s look at that in two ways.

First, we see that respondents are increasing their average in their portfolios year on year. Each year we ask them what percentage of their portfolios are held in sustainable investments, and how they see that evolving in the future. We collected the survey around mid-2022 and they reported at the start of the year, on average, they’d allocated about 32% of their portfolios, so about a third.

In five years’ time, though, they expect that that average would grow to over half their portfolio. And even already today about one in five said they allocated between 80% to 100% of their portfolios to sustainable investments, and now, what they’re saying is, in that same five-year period, about two in five would expect to do the same. So, we’re seeing a doubling of the high proportion of portfolios shifting.

But it’s not just these investors for whom sustainability is increasingly the consideration. It’s also traditional investors. So, we collect survey data from those who don’t categorise themselves as sustainable investors, and what’s interesting is even these traditional investors say they’re including environmental, social and governance factors in their investment decisions. And, in fact, this year 72% of the respondents indicated that they were using ESG factors, which is a huge increase from the 60% last year.

Now, ESG factors are primarily a risk mitigation tool, as I’ve written about before, but the fact that they’re seeing sustainability factors as a risk mitigation tool is a really clear indication of sustainability becoming part of the mainstream.

HP: Well, it’s certainly great to hear the level of commitment to ESG factors. We continue to see and feel the effects of climate change. How are investors responding to this challenge?

DP: Really in two ways, I think. One is they are managing climate risk in their portfolio and at the same time they’re investing in climate solutions. And again, the data’s really interesting here.

So, 86% of the impact investors and 75% of the traditional investors think that climate change is relevant to their portfolios. And, as you said, we can clearly see the effects that are happening both in terms of physical risks, but now also as governments are shifting what they’re doing into transition risks. So, with the result that around six in 10 are saying they’re looking to align their portfolios to at least the two-degree scenario of the Paris Agreement. 

Now, many respondents are already taking action to reduce their climate risk in their portfolios. Some of them, only about 16% this year, are saying that they know the carbon footprint of their portfolio, but of those who do, nearly half of them are saying we’re actively managing down that climate risk, and over a third are avoiding companies that are major contributors to climate change.

So, we’re seeing that aspect of the climate risk coming, but they’re not just seeing it as a risk, they’re also seeing it as an opportunity. Forty-three percent are targeting investments to support the transition to a low carbon economy, things like clean energy or the circular economy. And, interestingly, in that clean energy space, what we’re seeing, is more than half see renewables as an attractive investment over the next three years, most prominently in more established technologies — solar, wind, hydro — and to some extent some of the emerging ones — geothermal, wave or hydrogen — but some of the others as well, energy efficiency in battery storage. And what’s great is I covered this topic in our 2023 Outlook in an article called The Case for Clean Energy.

HP: Damian, within families, sustainable investment has been linked to the younger generation. Does the report suggest that this is still the case?

DP: Well, you’re right to note that historically, younger generations have been seen at the forefront of the movement. They’ve been, by far, the most visible and vocal, but they’re not alone any more. When we looked, nearly seven in 10 say impact investing is still being driven by the younger generations and, at the same time, what surprised me was the same amount, seven in 10, said the generation in charge of the family’s wealth is embracing it. So, to see that connection point and to see this older generation adopting and embracing sustainable and impact investing is a real shift over the last few years.

Now, the one other thing that did come out, which was very interesting, was that it’s seen as having a positive impact on family relations in really supporting this transfer of wealth, the intergenerational transfer of wealth that we’re seeing. Over a third say they’re engaging with impact investment to show that their family wealth can be used for positive outcomes, which is up from 23% from last year. 

So, it’s incredible to see that this is creating a bridge between these different generations and is actually a great opportunity for families that want to start thinking about the intergenerational wealth transfer to start having those conversations. It’s something that the younger generation can instinctively connect with, but actually helps the older generation to think about what are the values of the family and how ready are the kids to be able to take on responsibility and greater ownership over the family wealth.

HP: OK. Sustainability has become more prominent. Greenwashing has become an issue. Investors are clearly concerned that what they’re investing in may not have the impact that they are hoping. So, how concerned should we be about greenwashing, and what are some of the warning signals investors should be watching out for?

DP: You’re right that greenwashing has become a major issue in the industry as the industry has continued to grow, and what we see is a lot of new actors becoming involved in the space without a lot of the depth of knowledge that others who have historically been active have.

The report reveals those worries. At this point, 75% of all respondents say they have concerns, of which 52% have strong concerns, which is a massive increase from the 30% we saw the prior year.

Now, where respondents can feel as though they can alleviate those concerns, foremost, includes things like trust in the investment company or the investment leadership or the quality or robustness of the impact measurement and reporting process, or even the impact track record that some of the investment managers may have.

Now, regulators are stepping in to address this issue. They’ve been introducing sustainable investment labels, but these are really still new and evolving, which I do think explains why only 26% of the respondents currently feel like regulatory labels would alleviate greenwashing concerns.

Now, I actually discussed how investors could still use these regulatory labels to guide them in an article we wrote a couple of months ago, as well as some of the other actions they might take on avoiding greenwashing in another article called Greenwashing Caveat Emptor. So, I think investors can look to those to help to navigate and avoid this concern that we see dominating the industry.

HP: OK. So for listeners who would like to learn more about this report specifically, how can they do that?

DP: Well, I’m thrilled to say the overall report will be “live” on Wednesday, and clients should be looking out for an email from us. But anyone can go to the report hub and download the report. As well on that hub, there’s a few other things that I think will be of interest.

First, we have updated our three-part article series on greening your investment portfolio, thinking about how to set up, manage and account for the impact that your investments may be having from a climate change perspective. Additionally, we added an article on aligning family philanthropy and investing for impact, a topic we see growing interest in terms of thinking about how those two can be joined together.

And linked to this, is the first in a three-part podcast series where, in this instance, I’m joined by our Head of Philanthropy Service, Juliet Agnew, and she and I discuss some of the connections between philanthropy and investing and both our experiences and examples of how families and foundations are looking at these efforts.

And, as ever, I look forward to having conversations with clients. Last week we were enjoying time in Geneva, Zurich and Monaco, talking about some of these factors and I always look forward to hearing about how clients are addressing this and how these insights can help them move that forward.

HP: Well, thank you Damian, for your insights today. It’s certainly interesting to understand the practical ways investors are seeking to use their wealth and influence to address the challenges of climate change and improve the world in which we all live.

Let’s move on to the week ahead where the focus in the US will be on personal consumption, expenditures, income, spending and the price index, which is released on Friday. Given the usual source data, we see strengths similar to that of prior months for personal income, giving way to a smaller rise, 0.3% month-on-month, in December’s print. This mostly is reflective of a rise in hourly earnings in November, as well as the tick down in the working week weighing on overall wages and salaries during the course of last month.

As with the weak retail sales print for December, we see personal spending declining two-tenths of 1% month-on-month. In terms of inflation, we expect December’s decline of 0.1% in CPI to translate to a 0.1% month-on-month rise in the headline PCE measure, as well as a 0.3% month-on-month rise in core PCE. 

Energy, which acted as a drag in December’s CPI and PPI figures, will not be reflected as much in the PCE headline, that only received about half the weighting that it does in the CPI. Meanwhile, services make up a much larger contribution to core PCE, reflecting a greater weight in the index and differences in the source data for airfares.

Turning to the UK, well, we await the latest flash purchasing managers’ report on Tuesday. In line with our forecast for a gradual fall in activity over the course of the first quarter, we expect the composite PMI to edge slightly lower to 48.8.

We expect the unusually wide gap that has emerged between manufacturing and services to start to narrow. We are, therefore, forecasting manufacturing to improve to 45.7 as the easing of supply bottlenecks provides a tailwind for production. In contrast, we expect services to nudge slightly lower to 49.5 as energy bills and interest payments weigh on disposable incomes.

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.

(end of recording)