Markets Weekly podcast – 6 March 2023
Tune in as Alex Joshi, our Head of Behavioural Finance, examines how psychological factors can potentially impact decision-making across real estate markets. Meanwhile, podcast host Henk Potts provides an update on the latest events from the global economy, including UK/EU trading, eurozone inflation, and the US labour market.
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Henk Potts (HP): Hello. It’s Monday, 6th March 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 will then consider how we should think about the role of real estate within an investment portfolio. And finally, I’ll conclude by previewing the major events and data releases that are likely to shape the week ahead.
Good economic news was once again seen as positive for markets last week as traders hope that improving economic data and resilient earnings will be enough to compensate for a higher peak rate. Equity markets were in recovery mode following the sell-off in the first three weeks of February.
In terms of that equity market performance, well, on Wall Street stocks registered their best week since the end of January. The S&P 500 rose 1.9% and was up 5.4% this quarter. In Europe, the STOXX 600 rose 1.4% last week and is up 9.3% year-to-date.
In terms of bond markets, well, policy rate expectations filtered through to Treasuries. The 10-year Treasury yield broke through the 4% level for the first time since November, although is still below that 14-year high of 4.23% hit in October last year.
In terms of commodity markets, well, gold had its best week since early January. Despite those rising bond yields, gold was up 2.1% last week, its first positive week in five, and is currently trading around $1,847 an ounce, inflation continues to rise and the dollar weakened after four consecutive weeks of gains.
Inflation prints continued to surprise to the upside. Euro-area price pressures eased at a slower rate than expected last month. Headline CPI rose 8.5% in February. That compared to 8.6% in January, compared with an estimate of 8.3%. Perhaps of more concern was the core reading, which increased to a record 5.6%, from 5.3% in January, driven by sticky wage growth pressures and resilient consumer demand.
Markets have already priced in a 50-basis point hike from the European Central Bank later this month, now anticipating increases into the summer. We think the European Central Bank will raise rates by 50-basis points in March but also in May, followed by 25-basis point increases in June and July. That pushes the deposit rate up to an all-time high of 4%.
Whilst the inflation prints are clearly a cause for concern, that’s partially being offset by resilient activity data. In the US, the durable goods report added to the string of encouraging datapoints as business investment in goods that are made to last at least three years, outside of the volatile commercial aircraft category, rose at its fastest pace in five months.
The value of core capital goods orders increased by 0.8% month-on-month, boosted by demand for machinery and for computers. We think the key takeaway from the report is that corporate investment sentiment is holding up better than expected, given the fact that we have that rise in borrowing costs and the uncertain economic outlook. US companies appear confident that the downturn will be mild and will be short-lived and are, therefore, looking to invest in machinery, particularly trying to boost productivity in an effort to overcome the shortage of labour.
Activity data out of China continues to demonstrate the robust recovery following the lifting of COVID restrictions. Manufacturing activity in the world’s second-largest economy expanded at its fastest pace in more than a decade in February. Manufacturing PMI jumped to 52.6 from 50.1 in January. New exports rose for the first time since April 2021.
In fact, you could argue we are seeing a broad-based recovery playing out. Construction activity surged, helped by robust infrastructure spending and financial assistance to help struggling property developers. Meanwhile, services activity continued to rise with demand increasing for transportation and for accommodation.
We recently upgraded our growth forecast for China to 5.3%. We think, if anything, that’s starting to perhaps look a little bit timid. We are, of course, getting further clues to China’s growth profile and policy agenda from the National People’s Congress, which started yesterday. Remember, this is an annual meeting where China’s national legislature sets out the key focus areas.
Policy objectives for this year are expected to conclude boosting market confidence, expanding domestic demand, supporting the private sector, also attracting foreign investment. They’ll also be looking, I think, to defuse economic and financial risk.
From a market perspective, I think the focus will be on growth targets, fiscal budget parameters, the tone on monetary policy and policy support for the private sector. We are starting to get some of those headline numbers coming through. So the official growth target has been set at a conservative, it has to be said, 5%. We actually think that GDP growth could overshoot that target, given the fact we have seen that reversal in the zero-COVID policy.
The reset in the regulatory policy for technology and internet sectors we think will continue to be positive. The step up in the rescue efforts for private property developers should also help to stabilise that sector.
We’re also seeing, I think, pledges for a more supportive monetary and fiscal policy as the new leadership team prioritises growth. The official budget deficit for 2023 has been raised and now comes in at 3% of GDP. That’s up from 2.8% in 2022. Authorities have set the quota for local government special bonds at 3.8 trillion yuan.
In terms of the private sector, well, authorities, we think, will address concerns over policy uncertainty and the unpredictability of regulatory crackdowns, which have certainly damaged sentiment over the course of the past couple of years.
The Government Work Report reiterated targeted and forceful monetary policy, so we expect the People’s Bank of China to stay accommodative during the course of the first half of this year. We think that will be mainly through liquidity-related actions, things like cuts in the reserve requirement ratios and structural tools as opposed to cutting rates.
Moving on to the UK, where it’s the politics that have been grabbing the headlines as the UK and the European Union agreed a new structure will see the trading relationship with Northern Ireland switch from the Protocol to the Windsor Framework.
The new policy aims to reduce the administrative burden and frequency of checks required for goods moving from Great Britain to Northern Ireland so long as they remain within Northern Ireland.
In terms of where we go from here, well, a parliamentary vote is not technically needed, but the prime minister has committed to one with the timing to be confirmed in due course. If the DUP decides not to oppose the deal, as is seemingly likely, we think it’s safe to assume that some of even the most hard-line Brexiteers may start to retreat.
Assuming we do get a positive vote, we think the deal represents a significant thawing of the EU/UK relationship. It could also allow for a greater co-operation in other key areas, including financial services, security, scientific research and immigration.
So, that was the global economy and financial markets last week. Our colleague Stephen Moroukian was on this podcast a couple of weeks ago giving us an update on the real estate market in the UK. He said that property prices are being affected, as you’d expect, by rising rates, but the UK is very much still a tale of two markets, with prime central London expected to weather the anticipated market downturn better than most due to wealthy buyers that are less dependent on debt and continued shortage of stock or best in class properties.
We also think that element of the market will continue to benefit from the favourable dollar/sterling exchange rate. So, they’re some of the aspects that we’ve been talking about when it comes to real estate, but in order to talk about real estate within the context of a broader investment portfolio and from an investor psychology perspective, I’m pleased today to be joined by Alex Joshi, Head of Behavioural Finance for Barclays Private Bank.
Alex, great to have you with us. Thinking holistically about an investment portfolio, how should investors consider the role of real estate within the context of their asset allocation?
Alex Joshi (AJ): Good morning, Henk. Great to be with you this morning. So, real estate is of interest to many investors for financial as well as a multitude of practical and emotional reasons. But, many investors over-invest in the asset class versus a sensible asset allocation for their own financial goals and circumstances. The downsides of being overly concentrated is that you increase the riskiness of your portfolio.
If we think about returns, you know, real estate has performed well. It’s considered one of the best inflation hedges over longer periods. And if we look at asset class return rankings, from let’s say 2008 up until the present day, real estate has been sitting in the top half of annual performers three-fifths of the time. It’s averaged 6.4% on an annual basis versus 6.8% for global equities and 3.7% for investment grade debt.
And in the Market Perspectives article, which is out today, you can see that table. Another thing that you’ll see in that table is that with all asset classes, real estate included, returns can be very variable. It’s also difficult to assess the market return and many investors focus on prices and capital gains, but there are also servicing costs.
So, you know, for this reason, as well as many others, many institutional as well as retail investors have been gradually investing in listed REITs as well as specific illiquid funds, but many prefer to hold physical real estate and this can lead to behavioural biases.
HP: OK. So, we know that behavioural biases can have a significant influence on an individual’s investment strategy. How do these play out when it comes to real estate investing?
AJ: So, first let me start with why biases are particularly prevalent in real estate. So, real estate is a market where there are relatively high levels of market inefficiency and intermediations relative to say equities. There are lower levels of informational transparency and investors are more emotionally attached to property versus other asset classes due to its tangible nature.
So, a couple of those biases. First, is anchoring. There’s a tendency to focus on the capital gain based on the purchase price, and then this can lead to selling decisions, which are tied to the original purchase price despite a very different market environment.
Another one is familiarity. All of us have a bias towards familiarity, and that’s also the case when it comes to investing. And real estate is attractive because it feels real. You can touch a house but, in contrast, the stock market can seem uncertain and undefined for some investors.
HP: Well, as you say, some investors are very comfortable with investing in real estate but less so with other asset classes. What would you say to them?
AJ: So, many think about investing in the market, this one complex entity and one’s wealth is tied to its gyrations. But it’s important to think about investing at the micro level. When investing in a portfolio, an investor is not invested in the market but in companies. And so, when investing across asset classes, sectors and regions, an investor is holding shares in companies across the globe and these businesses do create tangible products and services.
And, just like a house, you can touch and feel and utilise these products and services. So, whilst an investor might be less familiar with other asset classes that compose a typical investment portfolio, this does not necessarily imply more risk. Quite the contrary. A diversified portfolio usually reduces risk and volatility.
HP: Well, Alex, you mentioned diversification. That’s, of course, a concept that we often discuss, but can you elaborate on what good diversification really looks like?
AJ: So, you know, real estate has provided strong, long-term financial returns in addition to its intangible benefits. You know, it’s also a place to call home. However, it would be extremely risky to hold all your eggs in a real estate basket or any other single asset class.
In striving to protect and grow wealth over the long term for an acceptable level of risk, holding a well-diversified portfolio across asset classes, sectors and geographies is important. When we think within an asset class, you know, within real estate, this could be a mix of residential and commercial real estate, liquid and illiquid in both public and private markets spread across geographies.
When investing, it’s important to have a strong and robust investment process, which leads to a well-thought-out strategic asset allocation to drive the core returns in a portfolio, and then use satellite investments for tactical positioning to enhance returns and mitigate risks. That seems like a sensible approach to follow.
HP: Well, thank you, Alex, for sharing your insights today. We know the topic of real estate investment is always of interest to our listeners. It’s been fantastic to consider the subject from a behavioural finance perspective today.
Let’s move on to the week ahead where the focus will be on the US employment report on Friday. We expect nonfarm payroll gains to decelerate in February compared to those very strong gains that we saw during the course of January, but not enough to dissuade the Federal Reserve from further rate hikes.
In terms of the numbers, we look for the US economy to have created 225,000 jobs last month. That compares to those 517,000 that we saw in January. We project the average hourly earnings to increase at a similar pace month on month of 0.3% and 4.8% year on year.
On the household side of the report, we expect the unemployment rate to hold steady at 3.4%. Remember, that’s more than a five-decade low that we’ve seen in terms of US unemployment rates. If we were to get a significant upside surprise, it would certainly add to the pressure on the Federal Reserve to consider maybe a 50-basis point hike at this month’s meeting. We’re currently projecting a 25-basis point increase. So, markets, as I say, will be waiting for those figures on Friday.
And with that, I’d like to thank you once again for joining us. We 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.
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