WEBVTT 1 00:00:10.640 --> 00:00:16.560 Hello and welcome to the May episode of Monthly Market Insights. I'm Phil Attreed, Barclays Head 2 00:00:16.560 --> 00:00:21.920 of Wealth Specialists. And once again, I'm joined by Will Hobbs, our Chief Investment Officer. Now, 3 00:00:22.720 --> 00:00:27.520 it appears we're set to remain in a relatively disorientating period for 4 00:00:27.520 --> 00:00:33.840 the world economy and for the investment markets that reflect what is a rapidly evolving outlook. 5 00:00:34.560 --> 00:00:38.720 Central bankers are raising interest rates in a way that we haven't 6 00:00:38.720 --> 00:00:44.080 been seeing for decades as the battle obviously against inflation has stepped up several notches 7 00:00:44.080 --> 00:00:49.440 in recent months. So much so that actually many are now warring about 8 00:00:51.280 --> 00:00:55.520 any forthcoming or the next recession. So we're talking a little bit about that today, 9 00:00:55.520 --> 00:01:01.840 Will, also the latest on Ukraine and obviously the evolving situation with China's Covid 10 00:01:01.840 --> 00:01:07.360 outbreak as well. So maybe we start with the central bank piece. We've had Bank of England 11 00:01:07.360 --> 00:01:13.520 and the Fed raising interest rates this week. You're even seeing interest rate rises drawn 12 00:01:13.520 --> 00:01:20.560 nearer in Europe as well. Will, have we learned much new from this information over this week or so? 13 00:01:20.560 --> 00:01:24.160 It's a good question, Phil, a good starter for one as they say. I mean, 14 00:01:24.160 --> 00:01:28.160 you're right and your introduction just saying, viewing as you and I know well, 15 00:01:28.160 --> 00:01:33.040 we've said this before but viewing markets through the prism, viewing the world through the prism of 16 00:01:33.040 --> 00:01:37.520 capital markets is a disorienting experience at the best of times and these are not they. 17 00:01:38.880 --> 00:01:44.080 But from a central banking perspective, let's start that like you say. In the US there was 18 00:01:44.080 --> 00:01:51.120 a bit of a very, very short-lived relief that the central bankers didn't go with the 75 basis point, 19 00:01:51.120 --> 00:01:58.960 they just went with the 50 basis point rise. That point alone illustrates how far we've travelled 20 00:01:58.960 --> 00:02:04.240 in terms of rate expectations so far this year. It continues as a result to be a horrible period for 21 00:02:05.120 --> 00:02:13.680 government bond investors, traumatic even, really a change in what most government bond investors 22 00:02:13.680 --> 00:02:18.560 have experienced in the last few decades. In the US you are likely to see more coming 23 00:02:18.560 --> 00:02:24.960 as well. There are still more 50 basis points rate hikes expected and as we've been discussing 24 00:02:24.960 --> 00:02:31.200 on Word on the Street, there are maybe some signs in the US that inflation is peaking a little bit. 25 00:02:33.520 --> 00:02:38.880 Certainly you are going to see over the summer some incredibly muscular forces 26 00:02:38.880 --> 00:02:43.760 trying to drag inflation back towards the ground a little bit. It's certainly those, 27 00:02:44.800 --> 00:02:50.480 as we lap those, the effects of those stimulus checks that should be a significant 28 00:02:50.480 --> 00:02:53.920 influence pulling inflation forces down. However, the big question really at the 29 00:02:53.920 --> 00:02:59.680 moment is, amongst bond investors and central bankers a little bit is: to what extent will 30 00:02:59.680 --> 00:03:07.840 the US central bank accept slightly higher than previously seen inflation in order to 31 00:03:07.840 --> 00:03:16.480 avoid crashing the economy. And this like you say, it's the other big market narrative at the moment. 32 00:03:16.480 --> 00:03:22.480 Are all these interests rates are they going to run the economy into the sand, US and global? 33 00:03:23.280 --> 00:03:28.240 And I know we're humble enough not to make any hard predictions here. But are we 34 00:03:28.800 --> 00:03:33.200 seeing any chances of the next recession evolve, is that something that you and the 35 00:03:33.200 --> 00:03:40.400 investment team are looking at, thinking about? We hear lots of seemingly credible commentators 36 00:03:40.400 --> 00:03:46.000 talking about how it's unlikely that we can avoid a recession given both the interest rate 37 00:03:46.000 --> 00:03:50.480 rises that we've had but also those that many are obviously predicting in the months ahead. 38 00:03:51.120 --> 00:03:55.520 Yes, one of the many lessons you might take from the last few years you and I is that you 39 00:03:55.520 --> 00:04:00.000 don't want to get too busy rubbernecking the political and economic accidents in the road 40 00:04:00.000 --> 00:04:04.560 ahead. What will be will be and investment markets don't always behave as you might expect in those 41 00:04:04.560 --> 00:04:10.720 circumstances. And anyway at the moment, the point we'd make to clients, as you know, is that 42 00:04:12.480 --> 00:04:16.560 your eye line should be well above the next recession if it's a year away, let's say. 43 00:04:16.560 --> 00:04:24.880 But I think on this point specifically, yes, interest rates are a very blunt tool and usually 44 00:04:24.880 --> 00:04:31.760 do come with lots of unintended consequences. So, some indication of that could be seen in the fact 45 00:04:31.760 --> 00:04:38.480 that actually since the 1980s, that was when you saw the so called Volker shock. So Paul 46 00:04:38.480 --> 00:04:44.400 Volker, the legendary central banker in the US, tamed inflation by raising interest rates to 20%. 47 00:04:45.760 --> 00:04:52.880 Now since then, actually you've seen that there's not much of the co-movement that you might expect 48 00:04:52.880 --> 00:04:57.840 or much of the relationship you might expect with regards to interest rates and inflation. 49 00:04:57.840 --> 00:05:03.520 You might expect as interest rates rise, inflation falls because that's the intention 50 00:05:03.520 --> 00:05:09.440 of interest rates. They're meant to slow aggregate demand and re-plug aggregate demand into aggregate 51 00:05:09.440 --> 00:05:14.080 supply, the available supply in the economy and so get price pressures under control a little bit, 52 00:05:14.080 --> 00:05:18.560 get everything travelling in equilibrium. But actually you find weirdly that inflation 53 00:05:18.560 --> 00:05:21.600 and interest rates have often travelled in the same direction for periods of time. 54 00:05:22.800 --> 00:05:27.600 So you can find that rising interest rates comes with rising inflation. Now the point here again 55 00:05:27.600 --> 00:05:33.440 is a little bit of humility because what you can find is that interest rates can for a 56 00:05:33.440 --> 00:05:39.360 load of reasons affect both demand and supply and therefore the relationship is really complicated. 57 00:05:39.360 --> 00:05:44.080 I think what you're seeing at the moment in the US, that's the other thing to bear in mind is it's 58 00:05:44.080 --> 00:05:48.480 not gentle. This is not the interest rate rises we've become used to in the last few decades. 59 00:05:48.480 --> 00:05:56.320 This is something the Federal Reserve is trying to engineer a materially tighter kind of monetary 60 00:05:56.320 --> 00:06:02.000 backdrop in quite a short space of time. Demand for everything has to cool quite rapidly, workers 61 00:06:02.000 --> 00:06:06.240 included. So you should see unemployment rise and those kinds of things. So yes, 62 00:06:06.240 --> 00:06:12.480 there are risks and there's many very garlanded names talking about the risks of a recession. 63 00:06:13.040 --> 00:06:17.280 But as an investor, I guess the key point we get to and I'm sorry, waffly long answer as usual but 64 00:06:17.280 --> 00:06:20.800 the key point what we do as investors. Now, I think there’s probably two things. One, 65 00:06:22.000 --> 00:06:26.160 and again, this is the point we've made before but this is where the word “recession” is not that 66 00:06:26.160 --> 00:06:32.080 useful. It's similar to “cake” or “dog”. There's many types of dogs and cakes 67 00:06:33.200 --> 00:06:38.880 some friendly some less so on both cases and it simply doesn't tell us that much useful for an 68 00:06:38.880 --> 00:06:44.400 investor because the word refers to such a broad range of experience from the economic horrors 69 00:06:44.400 --> 00:06:49.760 of 07/08 to recessions, which don't really even have a name because they're statistical only. 70 00:06:50.320 --> 00:06:54.640 We could take some consolation from the fact that the worst recessions in the past have 71 00:06:54.640 --> 00:06:59.920 tended, not always, tended to be preceded by a build-up in economic success. And therefore 72 00:06:59.920 --> 00:07:07.360 you need the purgatory forces of a recession to come along and correct those imbalances. 73 00:07:07.360 --> 00:07:12.000 That's not the case that we see right now. So actually which gives you, on to your second 74 00:07:12.000 --> 00:07:17.200 point, the US and this is remember the motor for, the keystone for the world economy, 75 00:07:17.200 --> 00:07:23.760 the most important capitalist economy by a mile. The US enters this period still in really very 76 00:07:23.760 --> 00:07:28.000 robust health with lots going for it particularly the private sector companies and businesses. 77 00:07:28.800 --> 00:07:39.440 The balance sheet health is sensational so, you have got a lot going for it. 78 00:07:40.320 --> 00:07:44.560 But it's a complicated time for investors. There's no doubt about that. And what you're 79 00:07:44.560 --> 00:07:48.000 seeing in the bond market at the moment, which I think is so interesting is that you're seeing 80 00:07:48.560 --> 00:07:53.600 investors suddenly start to look at compensating longer term lenders to the government for a bit 81 00:07:53.600 --> 00:07:59.200 more risk of inflation, which is an important moment, I think. Sorry long-winded answer but okay 82 00:08:00.000 --> 00:08:02.414 don't worry, focus on other stuff. 83 00:08:02.414 --> 00:08:06.177 I’ll remember the analogy anyway, the cake and the dog analogy. 84 00:08:06.177 --> 00:08:08.449 The two things on my mind! 85 00:08:08.960 --> 00:08:12.720 How is the situation maybe a bit different in the UK and for Europe? 86 00:08:13.600 --> 00:08:17.680 Yes, it's a lot different in the UK and Europe. Some of that strength is just not there, 87 00:08:18.560 --> 00:08:24.560 particularly in the UK. The latest data points in Europe, the services sector is still showing some 88 00:08:24.560 --> 00:08:30.320 sort of recovery from the Omicron blows. But the problem there of course is you're seeing in the 89 00:08:30.320 --> 00:08:35.200 last couple of weeks is this gas supply story. There is still the potential for that to be 90 00:08:36.320 --> 00:08:41.040 cut off and that would plunge the European economy into economic darkness for a short while. 91 00:08:42.240 --> 00:08:49.440 The damage would be most grievous on those sectors that are most reliant, 92 00:08:50.080 --> 00:08:56.160 so paper industry and so on, on gas supplies, and you're seeing accelerated plans to try and 93 00:08:56.720 --> 00:09:02.480 wean the economy off that Russian gas reliance. And in the meantime, you're seeing this debate go 94 00:09:02.480 --> 00:09:09.280 on, you've seen the discussion about the currency that Russian companies want to be paid in and 95 00:09:09.280 --> 00:09:13.760 this debate about, it's been taking up Poland and Bulgaria in the short run. 96 00:09:14.480 --> 00:09:21.040 So, there is that concern that could really change things quite quickly. In the UK, 97 00:09:21.040 --> 00:09:26.240 we've had the Bank of England this week. And I mean it's interesting, but 98 00:09:26.240 --> 00:09:30.640 the market had been expecting quite a lot of the Bank of England in the months ahead 99 00:09:30.640 --> 00:09:35.200 and you and I discussed this on Word on the Street and other media over time, the team 100 00:09:35.200 --> 00:09:42.240 have long believed that the market is being too optimistic or expecting too much of the economy 101 00:09:44.320 --> 00:09:49.680 in the idea that it can take so many rate rises without swooning, without aggregate demand really 102 00:09:49.680 --> 00:09:54.400 plunging and that is proving to be the case today. So you've seen an interest rate rise from a very 103 00:09:54.400 --> 00:10:00.000 conflicted Monetary Policy Committee. It's not of one mind at all, but you've seen that and the 104 00:10:00.000 --> 00:10:05.360 market is burying Sterling because what you're seeing across the bond market is that the market 105 00:10:06.907 --> 00:10:11.120 has taken out one rate hike so far but that is really in deference to the idea that the 106 00:10:11.120 --> 00:10:16.400 UK economy is too weak at the moment and for the next few months ahead to be able to take 107 00:10:16.400 --> 00:10:24.640 much in the way of the rate rides as you're going to see or should see, or likely see in the US. 108 00:10:24.640 --> 00:10:30.480 And in the UK and Europe, whereas you are seeing a peak or potentially a peeking inflation in the US, 109 00:10:30.480 --> 00:10:35.040 that peak looks to be a bit further away in the UK, you're seeing the regulator is going 110 00:10:35.040 --> 00:10:42.720 to give us another gift sadly, particularly the poorest households towards the end of the year, 111 00:10:42.720 --> 00:10:47.920 so you're not going to see a peek in inflation in all likelihood until much later on in the year. 112 00:10:47.920 --> 00:10:52.240 And you've got this very tough summer ahead in terms of real disposable income with 113 00:10:54.320 --> 00:11:02.800 these, oil and energy prices really sapping the consumers’ strength. So tough times ahead for 114 00:11:02.800 --> 00:11:07.760 the UK. There's no doubt about that. And that is why you're seeing very different market reactions, 115 00:11:07.760 --> 00:11:13.520 but happily, although obviously we're vested in the UK economy doing well, the team is 116 00:11:13.520 --> 00:11:18.800 necessarily dispassionate so far that's been a good position in portfolios to be underweight 117 00:11:18.800 --> 00:11:24.720 in Sterling relative to G10, its G10 peers, and that's making money for the portfolios today. 118 00:11:24.720 --> 00:11:31.040 And to complete the global picture, we shouldn't forget China. It's been a very tough period for 119 00:11:31.040 --> 00:11:38.960 China year to date we've seen the first material Covid outbreak since the beginning of 2020 there, 120 00:11:38.960 --> 00:11:45.760 the economy was already fairly wobbly. So are there any concerns of worsening there and what 121 00:11:45.760 --> 00:11:48.258 that might mean in terms of knock-on effects? 122 00:11:48.258 --> 00:11:51.050 Yes, it's a good question, Phil. There are some 123 00:11:51.050 --> 00:11:56.640 very welcome signs that this current wave of Covid is peaking, many may be a little bit wary 124 00:11:56.640 --> 00:12:01.920 maybe understandably of the case data, but if you look at mobility statistics and real-time data, 125 00:12:02.560 --> 00:12:07.440 you can see some improvement suggesting that some of the lockdowns are easing. 126 00:12:07.440 --> 00:12:12.320 The economy is far from out of the woods though as we've been saying, the problems 127 00:12:16.400 --> 00:12:21.360 highlighted by the property market blow up of last year, the Evergrande affair, they remain, and you 128 00:12:21.360 --> 00:12:28.720 are still seeing and will likely see for some time yet snap lockdowns as China's policymakers 129 00:12:28.720 --> 00:12:33.520 continue to battle this much more transmissible variant. I think that's the main thing. 130 00:12:33.520 --> 00:12:40.000 But China is just not as important for the world economy in its capital markets than the US, 131 00:12:41.280 --> 00:12:47.920 and we all want China to do well, we all want the world economy to do well. But it's just less 132 00:12:47.920 --> 00:12:51.040 important from an investor's perspective. The other point to make here just from a 133 00:12:51.040 --> 00:12:55.840 portfolio perspective is that we are actually underway EM (emerging markets) equities relative 134 00:12:55.840 --> 00:12:59.840 to DM (developed markets) equities. So again, China's plight is being a little bit helpful, 135 00:12:59.840 --> 00:13:09.120 even though we are necessarily dispassionate but that again has been helping portfolio performance. 136 00:13:09.120 --> 00:13:13.680 And I suppose lastly on that point, are there any particular changes to positioning that you 137 00:13:13.680 --> 00:13:18.000 and the team are considering amongst all of what we've just talked about? 138 00:13:18.000 --> 00:13:24.240 Yes, the main one that's been put on this month has been, actually we've taken out 139 00:13:24.880 --> 00:13:32.160 a net overweight to developed equities and replaced it with a relative value 140 00:13:32.160 --> 00:13:35.200 trade between development market equities and emerging market equities. 141 00:13:35.200 --> 00:13:39.360 So your overall package of positions in the Tactical Asset Allocation (TAA) 142 00:13:40.080 --> 00:13:45.680 is probably slightly negatively tilted in terms of bad news being better than good. 143 00:13:47.360 --> 00:13:54.000 But not materially so but as we entered this period we thought that strong directional views 144 00:13:54.000 --> 00:14:00.080 are probably not the way to go and so have moved into that relative value area a little bit more. 145 00:14:00.080 --> 00:14:04.560 The other one, which we're watching very carefully obviously, is that open Sterling position. 146 00:14:04.560 --> 00:14:11.120 It's now moved, some distance from where we put on the trade so it's just one to watch. I think 147 00:14:12.800 --> 00:14:19.680 there's a lot of data coming up; there's a lot of stuff happening in the world economy in the coming 148 00:14:19.680 --> 00:14:26.400 months, outside of the unpredictable unknowns of Ukraine, you've got giant forces pushing 149 00:14:26.400 --> 00:14:30.560 and pulling the global economy. You've got this central bank context we have not seen for decades. 150 00:14:31.360 --> 00:14:39.200 So it is a really interesting time to be an investor obviously and this is where the team 151 00:14:39.200 --> 00:14:44.480 does their best work, so that's the good bit. But otherwise, we must hope that the various 152 00:14:44.480 --> 00:14:47.840 people suffering the various blows around the world economy from Financial to 153 00:14:48.960 --> 00:14:54.560 Healthcare that's something we hope moves on quickly and we get to better times. 154 00:14:55.440 --> 00:15:00.160 And of course your reference to being slightly negatively tilted assumes that a client is already 155 00:15:00.160 --> 00:15:07.680 fully invested. So, it's absolutely not suggesting that we should be negative. But that actually 156 00:15:08.240 --> 00:15:10.901 that's a negative tilt to a normal position. 157 00:15:10.901 --> 00:15:13.149 Phil, that's a very good point to finish off 158 00:15:13.149 --> 00:15:18.400 on because obviously the size of the positions relative to your overall asset allocation, the 159 00:15:18.400 --> 00:15:25.360 Tactical Asset Allocation is tiny. We could only necessarily muster small confidence in those kinds 160 00:15:25.360 --> 00:15:31.120 of views, really it continues to be the Strategic Asset Allocation that you need to take solace in. 161 00:15:31.120 --> 00:15:34.400 That's where it's got diversified commodities and all sorts of 162 00:15:34.400 --> 00:15:37.920 other assets to be able to smooth your journey and that continues to do pretty well in the current 163 00:15:38.720 --> 00:15:44.480 backdrop, but that's really where the meat and drink of your portfolio returns is. 164 00:15:45.600 --> 00:15:49.440 The TAA just looks to provide a few class-A cherries, let’s say. 165 00:15:50.240 --> 00:15:54.400 Fantastic. Thanks. Useful as always, Will, and thank you to our viewers 166 00:15:54.400 --> 00:15:58.400 and listeners for joining us today. If you would like to keep in touch with our views 167 00:15:58.400 --> 00:16:04.147 over the course of the next month, please do check us out on our podcast Word on the Street.