Markets Weekly podcast – 18 November 2024
18 Nov 2024
Long-term investment goals vs. short-term volatility
20 May 2024
Tune in as Alex Joshi, our Head of Behavioural Finance, examines the importance of maintaining long-term investment horizons during periods of short-term volatility. Meanwhile, host Julien Lafargue explores US inflation, the health of the Chinese economy and upcoming data releases from the AI sector.
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Julien Lafargue (JL): Welcome to a new edition of Barclays’ Market Weekly podcast. My name is Julien Lafargue, Chief Market Strategist here at Barclays Private Bank, and I will be your host today.
As usual, we will review last week’s events before moving on to our guest segment. And, this week, we are very happy to be joined by Alex Joshi, the Head of Behavioural Finance here at Barclays Private Bank, to discuss a topic that is very close to our heart, and that we continue to discuss which clients, which is the topic of being invested and the importance of compounding and long-term time horizons. But more on that in a second.
When it comes to the events from last week, well, it was a pretty good week in equity markets once again. Many industries actually broke new all-time highs, whether it was in the US or in Europe. We’ve also seen continued positive momentum in Asia, and China in particular. The drivers behind this latest move higher were twofold.
First, we got encouraging news. By encouraging, please read worse than expected, and I’ll get back to this point. And we also got some supportive commentary from central bank officials, and particularly at the Fed. The Fed is actually continuing to push back strongly on any talks of potential additional interest rate hikes, which is something the market sees positively at the moment.
When it comes to the encouraging news flow, from a macroeconomic standpoint the key highlight really was the US consumer price index, the CPI. And, in April, inflation in the US was up 3.4% year over year, that’s on the headline level. That was in line with expectations, but the good news came in the form of the downward move from March. In March inflation was 3.5%, so a slight improvement there.
And in addition to that, the core measure dropped by 0.2 percentage points to 3.4% year over year, which after three months of higher-than-expected readings on inflation, suggests that the disinflationary process has resumed.
We also got mixed data coming from several local or regional Fed surveys which, when taken together, suggest that the US economy is starting to soften. Whether it’s on the inflation front, we discussed previously the recent job market data, this latest batch of surveys all point to the direction of a slower economic momentum in the US, which is bad news if you look at it holistically.
But the market interprets that as a positive development, simply because it means that the likelihood of potential Fed hikes has been declining quite significantly and, at the same time, the possibility of a Fed intervention, in the form of an interest rate cut, could be brought forward to potentially September this year.
Outside of the US, we also got positive news from China in the form of, again, the inflation figure for April, which came, this time, slightly higher than expected with headline inflation up 0.3% year over year. The consensus was looking for 0.2%, and that was a step up from the 0.1% reported in March. So, really China seems to be escaping deflation whereas the rest of the world is praying for lower inflation. In China, what we want to see is inflation ticking higher, as the country has been fighting with deflation for some time.
Not only that, but we also got a range of new measures being announced by local authorities in order to try and support their healing real estate market, which, again, helped boost sentiment towards Chinese equities, which have been one of the best-performing markets in recent months. The only cloud on the horizon was the retail sales figures in China at 2.3%, which were a bit of a disappointment and below expectations.
It was, overall, a relatively quiet week on the macro front to be fair. The week ahead is not going to be very busy either, but we still have a few catalysts to go through. But before we list those, let’s move on to our guest segment. And as the macroeconomic news flow seems to be slowing down a bit, it might be a good time to take a step back and think about longer-term investing.
And, for that, it’s great to have Alex Joshi joining us today to remind us why it’s so important to be and to stay invested. And maybe, Alex, that could be my first question to you. Why are we talking so much about the importance of getting and staying invested? Do you have any data that can back this up?
Alex Joshi (AJ): Hi, Julien. Good to be back with you and a great question. So, our clients seek to protect and grow their wealth. And to do so, the very first thing that needs to be done is to beat inflation. And the Barclays Equity Gilt Study is a study, which was produced by our Investment Bank, which looks at long-term asset class returns and goes back close to 130-plus years.
There’s a lot of data there which is very compelling when it comes to this statement that we all make about the importance of getting and staying invested, and so what I’ll do is I’ll read out a few numbers here from the report, which I think are useful.
So, this is simply real investment returns by asset class. So, let’s look at the US for a minute. So, this dataset is from 1925 up until the present day and it just simply lists the returns. If we think about 2023, and we look at the data there, so the real returns from equites were 20.4% (per annum), from government bonds they were minus 0.2%pa. TIPS were minus 2.1%pa, corporate bonds 7.3%pa and cash 1.6%pa. So, a very compelling year there when you think about getting invested and the returns that you would have got.
Obviously, this is one year in isolation. So, let’s think about longer term. And so, if we look at over 10 years, for equites the returns would be 7.3%pa, for government bonds they would be 0.6%pa, so negative 0.6%, and for cash negative 1.6%pa. So, you see there the importance of having that equity exposure.
And then if we look out to 20 years, for equities it would be 6.4%pa, for government bonds 1.4%pa, for corporate bonds 2.5%pa and for cash minus 1.2%pa. So, I think very compelling numbers there when it comes to that statement.
JL: Yeah, that’s a lot of numbers but I think that the message is clear. Equities tend to outperform. They tend to outperform over a longer-term period of time as well. And they’re probably the asset class that is best positioned to beat inflation, ie when you adjust returns for inflation it’s clearly equities that are actually the standout. Now, hopefully people are aware of those long-term numbers and how equites have done over time, and we know that past performance is not indicative of future results.
But there is always another side to that coin, which is volatility, when we’re thinking about why people may not be willing to get invested in the first place. It’s not so much whether they’re scared of potential returns 10 years from now, especially on the equity side, it’s maybe the entry point to the volatility associated with stocks and other asset classes really in the short term. Do you have any thoughts around volatility and how to tackle that?
AJ: Obviously, volatility is very much part of the investment journey. It’s very difficult to avoid it, but it doesn’t necessarily have to prevent investors from reaching their goals. And I think it’s important to make the point here that you have to take some risk when investing to earn the returns. What is encouraging, and the data backs this up very strongly, is that the variability of returns falls with time. And so over a day, a week, a month, a quarter, a year you’re going to see quite significant volatility if you’re looking at a portfolio every day. What we find is this variability associated with the returns across asset classes falls over time.
So, there’s a nice chart in the report which shows how when you go from one to five, to 10, to 20 years plus, that variability of returns falls very dramatically. And over a 20-year period, both in the UK and the US, what you find is the returns profile of government bonds and bonds in general is skewed very much to be positive. And then when you look at equities, it is completely over the line in the sense of 100% probability of a positive return based on the term period assessed, which is closer to 130 plus years.
When clients talk and ask us questions about the returns from say equities versus cash, there’s typically this concern of, well, I want to protect my wealth. There’s a lot going on at the moment. I’m nervous about the headlines, I think cash is a good way for me to park some of my wealth, at least for the time being, allow me to be comfortable and then later make a decision.
What we find in this is, with UK data, when you look at equities versus cash the probability that equities will outperform cash on any two-year basis, history shows has been 70%, whereas if you extend that out to 10 years, that rises to 91% and, if you extend beyond that, obviously you’re going closer to 100.
So, there’s this concern about getting invested because of the likelihood or the probability that one might make some losses, but if you think about the time period that investors are investing for, their typical investment horizon, well, the data’s very compelling both from the returns perspective, but also the volatility associated with those returns.
JL: Yeah, I guess time just smooths out everything, returns as well as volatility, and the volatility of those returns. So, while equities may be quite volatile in a very short period of time, we just went through the earnings season and we’ve seen some significant moves here and there, the reality is if you extend that over a five- or 10-year period, you would barely notice those types of moves.
Now, look, we’ve been through a lot of numbers and for the audience that might be a bit tricky to follow. I would encourage anybody who can to maybe have a look at this report that you’re referring to, a lot more data into that. But can you put all that into some representative numbers that help us to get a good grasp as to what is the ultimate outcome of being invested versus not being invested?
AJ: So, let’s take the UK first, and then let’s look at the US. So, if we think about the UK, and let’s think about the period from 1990 up until the present day, and let’s imagine that you invested 100k into various different asset classes and the gross income was reinvested. So, if we take that 100k, then today, in terms of real returns, in equities that would be 427k, in government bonds that would be 260k, in index linked gilts it would be 219k, and in Treasury bills it would be 111k.
Now, if we think about the US and we think about 1925 up until the present day, and let’s take again 100k in terms of dollars, what would that be worth in terms of cash today, that would be 134k, in government bonds it would be 776k, and in equities it would be 57,471k, so very compelling numbers there.
Now, I recognise that these, especially for the US ones, are long-term numbers which may seem unrealistically longer than the typical horizon an investor might be thinking about when they’re observing the markets and thinking about investment decisions, but for investors that are investing not just for themselves, but also thinking about future generations and thinking about actually when that wealth is going to be passed on, these are far more realistic than one might first imagine.
We’re used to thinking about markets in the short term and following the news headlines, but actually a typical investment horizon is far closer to the ones that I’m talking about when we think about actually what is the intention of that wealth.
So, in summary, a long-term view is important when investing, as we’ve covered many times before. It can help investors to overcome some of the behavioural challenges of investing, overcome behavioural biases that can impair decision-making and drag on returns. And, most importantly, the data strongly makes the case for long-term investing.
JL: Great. And I think as I was listening to you I was sort of thinking to myself, you know, yeah, but I have let’s call it 100k to invest as savings or cash and thinking, oh, I don’t see myself locking that money for the next 10 years, I might need some. And in reality, this is not about parking the entirety of someone’s savings or wealth into equity markets or a diversified portfolio for the next 50 years, it’s about finding that money that is designed to be there for the very long term and can afford to be compounding while being invested.
There is definitely a place for liquidity, and people have liquidity needs and cash is a great instrument for that, but I think if you’re starting to look at the wealth or the bucket into which you want to put this specific part of your wealth, and that bucket is designed for the next generation or for the next 10 or 20 years, then definitely equities, or a diversified portfolio at least, is a better place than cash for that.
Excellent. Thank you so much. Again, I really encourage everybody to, if they can, take a look at this Equity Gilt Study from Barclays Investment Bank, a lot of very interesting datapoints on the return of various asset classes.
Now, let’s go back to the more immediate and short term, looking at the events on the calendar for this week. Well, on Wednesday we’re going to get the UK CPI data, quite an important data point. This is going to be a reading that we hope will see core prices being up only, so to speak, 3.6% versus a year ago. Where we could see a very significant drop and what could grab the headlines is on the headline inflation rate, so inflation including more volatile prices, such as food prices or energy prices, because we might get very close to 2% and that is mostly thanks to favourable base effects. So, after the Bank of England’s rather dovish communication in recent weeks, we think it would take a significant upside surprise for markets to start pricing out the possibility of a first interest rate cut this summer.
We’re also going to get the FOMC minutes, so the minutes from the Fed’s last meeting. And here what we’re going to be looking for is really to see if there is any kind of consensus emerging at the Fed around the path for US interest rates. We know that markets have been playing around with the idea of hikes. We know now that the Fed is, at least for the time being, against that. But the question becomes, OK, are they actually going to cut this year at all, or is the mantra to keep interest rates higher for longer?
And, finally, probably one of the main catalysts of this week, although it’s company-specific, but given the importance of the company in terms of size as well as influence around what has been a key theme within markets for a few months now, which is artificial intelligence, we are going to get Nvidia earnings, the semiconductor company, and expectations are pretty high. Now, sell-side analysts are anticipating revenues to be up more than 240%, that’s versus last year, and earnings should have jumped almost 400%. So, clearly, a very high bar for Nvidia to clear, but if the company does manage to do so, we could see renewed optimism around AI.
Anyway, we will be back to debrief all this, not next week as it is a bank holiday in the UK, but the week after next. But, in the meantime, as always, we wish you all the very best in the trading week ahead.
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