Markets Weekly podcast – 13 November 2023

Julien Lafargue (JL): Welcome to a new edition of Barclays Private Bank Markets Weekly podcast. My name is Julien Lafargue, Chief Market Strategist here at Barclays Private Bank, and I will be your host today

And, today, we have a slightly different edition of the podcast, a special ‘Outlook 2024’. We just released our ‘Outlook’ for next year, and we thought we would spend a few minutes discussing the main takeaways from that document, which is our flagship publication.

As always, in looking at the outlook and what lays ahead, the team and I have spent a lot of time thinking about what could 2024 look like, what are the risks, what are the opportunities, and how do we want to be positioned going into this year?

And if we think about 2024, I think we can probably say with some degree of conviction that the world is as uncertain, if not more, than it was this time last year, and really anticipating what will happen next is an ever-more challenging task.

Now, I think the base case for us looking at 2024 is that the whole recession debate that you will probably read a lot about as you go through different outlooks, this debate around recession is misplaced in our view.

If the question is, are we going to see a repeat of the 2008-type near collapse of developed economies, well, clearly, the answer, from our end at least, is no. Could we see a relatively significant slowdown of economic growth in the developed world? Yes. 

Will we be flirting with recession in many countries? Probably yes. 

But, recession or not, as investors, we’re not in the business of buying or selling GDP figures. We’re here to invest in stocks, bonds, commodities, real assets, and to try and figure out how those will react to both macro and micro economic development.

So, while we do expect a world where economic growth trends lower, as I said, sometimes flirting with contraction, we also expect inflationary pressure to recede, albeit gradually.

But what does it mean? It means a world where lower growth and lower inflation are compounded by higher uncertainty. And, to position in this environment, we think that, first and foremost, a well-planned and appropriately diversified portfolio remains the most robust financial planning tool for someone who’s looking to achieve his longer investment goals.

But if we look at each main asset classes, if we think about what it means from a positioning standpoint on the fixed income side, on the equity side, as well as, you know, other asset classes, I think we can make a couple of statements based, again, on our views looking ahead into 2024.

On the equity side, I think the main message from us will be that we want to play defence in equities. What do we mean by that? Well, with a lower growth environment with valuations where they already are, we don’t think upside is necessarily significant, at least at the index level. And we do think that markets will, at times, struggle for direction, potentially experience some downside risk, and we want to be positioned for that.

Playing defence means favouring sectors that would benefit if yields were to come down, which is something that we do expect to happen in 2024. After all, with lower growth and lower inflation, there is no reason for us to expect that interest rates will move higher. If anything, as we move through 2024, we believe rates could actually come down. 

And we want that to be reflected on the equity side by owning sectors and companies that may have a positive correlation with lower bond yields, and you will find those type of company mostly in sectors such as utilities or consumer staples. We also continue to maintain a strong focus on higher quality, higher growth type of company, because we believe those will also represent an area of safety in 2024.

Now, from a fixed income perspective the message is, well, honestly, fairly similar in the sense that with lower growth and lower inflation, as I mentioned, we do expect interest rates to gradually come down as next year progresses.

If you recall, our message for 2023 was fairly straightforward. We wanted clients, we wanted investors to lock in yields, something you’ve probably heard us say many, many times. What we wanted really is for investors to rediscover their fixed income asset class for what it is supposed to be, an income provider. Therefore, we wanted people to be able to own fixed income instruments with the intention of keeping them until maturity only realising, so to speak, the income component of it.

As we look into 2024, we do see a possibility for the fixed income asset class to become more than an income provider. What we mean by that is, if rates do come down, as we expect in 2024, fixed income instruments could not only provide income but also capital return, capital gains, so to speak.

And, for that reason, we think whereas 2023 was about locking in yields, we want to go beyond that in 2024 and what we really want to do is gradually extend duration, i.e buying longer-dated bonds with the intention not to own them necessarily until maturity but, probably, to trade them throughout the course of the year or maybe into 2025 as we do believe rates will be lower by then.

But the third message coming from our ‘Outlook’ is one around diversification. We always talk about diversification, but the reality is, this is the only, you know, free lunch that there is in the market, and we have to remind investors how important it is to, not just think about this asset class or that asset class but think about a portfolio as a whole. 

And, while we want to play defence in equities and we want to go beyond locking in yields and, potentially, extending duration in the fixed income space, for the rest of the portfolio, we really want to be able to improve the risk/reward of those investments by bringing strategies, solutions, that will improve diversification, and we see this diversification coming in in various forms.

We continue to remain very attracted by the private market asset class, whether it’s on the private equity side or the private credit side. We do see a lot of opportunities in this space. We do think hedge funds, especially those that have a very low beta to the market, that have low net exposure could be an attractive source of additional return without necessarily increasing the risk of portfolios.

With rates higher, with volatility still subdued, there is a lot to be done in the options space, whether it’s hedging portfolios at times, whether it’s looking at structured products, when they make sense, either to offer some capital protection with upside participation, or to simply just rebalance the risk/reward profile of any given investment, we do see a lot of opportunities there.

So, maybe to conclude, our ‘Outlook 2024’ is out. As I said, the message is one where we do expect lower growth, lower inflation. Those should translate into higher uncertainty, but also lower interest rates and we want to capitalise on that by playing defence in equities, by extending duration in fixed income, and, finally, by making sure that the portfolios that we have in place are well diversified to account for the numerous risks that we see going into 2024. 

We have to remember that we’re going to see, potentially, two major elections next year, one in the US and one in the UK. We also have central banks that are likely to change course. We have geopolitical tensions that remain quite elevated as we speak. So, a lot of things could go wrong and some of those could actually go right, but the reality is there is a tonne of uncertainty and so diversification is really key.

Now, I’m not going to go into much more detail. I’ll let you consult the ‘Outlook’. Hopefully, you’ve received it or, if not, it’s available on the Barclays Private Bank Insights page. It’s available there for download, so I encourage you to have a look at it. And what we will do over the next few weeks is bring the different experts from the team to discuss in greater detail their particular outlook for their asset class and, hopefully, that will give you a bit more ammunition in order to prepare for the year ahead.

In the meantime, thank you very much for your time today. We will be back with more content around this ‘Outlook’, and this week we will wish you a very successful week ahead, as well as a very successful 2024. Thank you very much.