PHIL ATTREED: Hello and welcome to this July episode of Monthly Market Insights. I'm Phil Attreed, Barclays’ Head of Wealth Specialists, and I'm joined once again by Will Hobbs, our Chief Investment Officer, as we try to unpack what's been happening in the world of investments and what this means from investors that we manage money for.
So looking back, the first half of this year has been historic for all the wrong reasons. This was the worst start to a year for US bonds on record since about 1900 I believe, Will, and it was the fourth worst start for US stocks and also actually the worst start since the 1970s and the upshot of all of that was a terrible six months for the traditional 60/40 balanced portfolio of assets, if you're looking at equities and bonds, is actually the second worst start to the year on record by that measure.
Now, of course, we've regularly covered why this has been such a challenging period for investors. So we've got war, unrelenting pandemic, the cost of living crisis, and now an incoming recession. We've also touched on why some of our funds and portfolios have actually been somewhat resilient to date, but nonetheless, Will, let's start with a quick summary from you, if you may, maybe of the forces pushing and pulling markets over the last six months.
WILL HOBBS: Yes. It's been biblical hasn’t it? There’s been war, famine, disease, it's been a really very different half a run. But I think for capital markets, the major thing really, is this sense that central bankers may be getting boxed into a corner in their fight against inflation.
In order to bring inflation to heel, to get it back into target, that the central bankers with the blunt tools they have on offer and the very limited visibility that they may be forced to do harm to the US economy and what you're seeing – to the global economy, I guess – and what you've seen across the half, and if you remember we've talked about this a number of times but 2022 viewed from this time last year, or just a little bit before, really this was seen to be a year of monetary nurture, central bankers trying to help the economies along and nurture them out of the blows of the pandemic.
Obviously inflation has changed those plans dramatically. Stickier-than-expected inflation and some worries that inflation expectations that key transmission into longer term, more problematic inflation that they're slipping the knot a little bit and that's got central bankers rightly very worried. And that's made investing very difficult.
And more broadly, this is one of the things that we've worried about for some time and this is why we design our multi-asset class funds and portfolios as we do; that's why we spend so much time and energy thinking about and implementing diversification and robustness.
JP and the guys and Ian and the guys, it's really just about making sure that you're ready not just for the future that extends in a straight line from the recent past but where you get shocks to that path one way or the other and we are at a moment where potentially we're looking at quite a different macroeconomic outlook versus the one, our pre-2019 macroeconomic tram lines. We seem to be off those at the moment. We may return to them, but for the moment we’re speculating about a different world.
PA: I guess all of that explains the focus on the next recession for investors, right here, right now. Central bankers of course deliberately trying to slow the economy in the fight against inflation, but with seemingly relatively blunt tools actually and precious little by way of visibility of what might come next. The risk is surely though as many are worried about that they might choke off economies so much that we move into contraction mode.
WH: We've made that messy probably quite poor analogy a number of times about you imagine that you're driving a car: and in a way the central bankers just like us driving our cars sensibly and sustainably you're trying to get the car to travel at its optimal speed of travel, where the engine is operating perfectly and not over straining it or under straining it. Under straining it is obviously a recession and over restraining it is broadly speaking inflation.
The problem, to stretch this somewhat poor analogy a bit further, is that central bankers unlike driving a car where you probably know what the optimal speed of travel is, for central bankers that speed is always changing and it's not visible anyway, it's not observable. So like you say, it's very complicated, these are very blunt tools and there is a risk of recession.
Now from our perspective, I have to admit this is not something we think longer term investors should be getting too vexed by to be honest. The word ‘recession’ is not that useful here. We've said before, recession is a bit like ‘dog’, ‘cake’, ‘pandemic’, not that there are good pandemics and bad pandemics, but maybe a better example is a ‘dog’ or ‘cake’. There are bad dogs. I have some experience of them. Bad cakes, I have had some experience with that last weekend, but those words conceal a huge range of experience and the same is true of recessions, let's say.
I finally get to the point. And here our expectation is that if you assume that most recessions have a ‘purgatory’ role: they cleanse the economy of imbalances, that's one of the roles of recessions in the past.
Those imbalances look to be still substantially absent the US private sector, the global private sector looks in reasonably good health, balance sheet strength, so on and so on. The need for a big Augean clear out doesn't seem to be there. So to that extent, we don't think this is one that's really worth being either in or out of investments if there ever was such a thing.
So in reality the thing that we ask our already invested clients to do is to trust that the teams that we have internally are trying to tweak exposures in order to make the most of whatever's incoming you're seeing the asset allocation, the TAA team with short-term focus, those guys are just literally incentivised by just that piece trying to add extra tens of basis points of performance. And that's really what you want to do.
The other thing just to bear in mind is that these things can throw up little opportunities here and there, mis-pricings, emotion can get in the way of efficient pricing and those kinds of things are things we’re looking for at the moment.
But be careful. It's a good time to tune out those commentators who are talking too knowledgeably or too authoritatively about what's coming next. It's a nice time to purge bad commentary as well and just the main message from us is as usual: stay invested and keep your eye line fixed on that medium- to long-term potential for productivity rather than rubbernecking the potential accidents in the road ahead, I guess.
PA: And so I suppose the obvious question is: if all recessions aren't made equal, to what extent should we be trying to ignore the textbooks, if you like, to ignore the explanations of economic cycles and recessions and the likely market responses based on previous average cycles that we may have seen? And all of that is caught up in a lot of the rhetoric that we see, as you say, from commentators at the moment.
WH: Yes. In a way we want to be very careful, like you say, here. We want this to be a science don't we always? And I think the industry tries to make it into the science by looking at the average experience of past recessions like you say and we come up with a stylised idea about what happens, what leads what, and what assets to buy at a particular point in time: “now's the time to buy credit when this indicator is here and stocks are there”. Be careful, we would say.
There simply aren't enough recessions, major recessions in the post-war period for there to be much statistical significance, much to get your teeth into in terms of credible, plausible, supportable stuff to say about recessions in many ways. That doesn't mean you ignore it all together. I think our team internally, that will be part of the decision making in terms of how to orient yourself, whereabouts are we, what do the stylised analyses say?
But remember, I think this is an area where the industry, where the nuance can be lost. So whereas the guys internally are full-time, focused on tactical asset allocation, very aware of the shortcomings of the data set, all that kind of thing, when you see these analyses published more widely that nuance gets lost.
What you have to see in the industry, as you know is that conviction sells. You don't want wishy-washy, the marketing people don't want the wishy washy “it may come, it may not” kind of thing. They want: “this is going to be this case, this is what you need to buy then” because that's what cuts through, what provides cut through, that dreadful expression. But in a way, beware of that. The needs of marketing and the needs of investors aren't always the same, in fact quite often they are at loggerheads.
And from our perspective again, the key thing to remember (we've been doing these videos through some thick and thin haven't we, each time it seems we’re telling each other this really) is: don't let your visibility go too short, don't look too close to yourself. Keep that eye line up above. That's what medium- to long-term investors really need to stay focused on, your long-term investment goals that kind of thing. Don't make any rash judgments based on shouty headlines or over-strong convictions from some of our competitors maybe.
PA: So with all of that conviction that might or might not be out there, where does that leave the investment team? Where does that leave you and the colleagues that focus on this day and out, the tactical team as you've referenced today? Tempted by market levels?
WH: Yes. It's very interesting. In this job, it's been one of the most, in amongst all of the horror and tragedy and everything, I mean from a professional perspective the challenges of the last couple of years have been challenging, let's say, and very interesting in some ways. That's not, please, that should not be taken as in any way to undercook or understate anything that anyone's gone through during this awful period but as our job is, the team I’m lucky enough to represent, their jobs, multiple teams, are to make the most of our clients’ savings, to make sure that they're maximising the opportunity for returns, all-weather returns for our many treasured clients.
And so from that perspective, it's been a good period in many ways because the team and their philosophy and their hard work have been rewarded by very impressive performance. And I think at the moment what you look at is there's a number of very interesting things.
If you look at, some people are looking at duration, as in bets on some parts of the fixed income complex, which look quite interesting giving how far that space has moved after the worst half known on record. And even stocks – we do think that stocks are, risky assets are still in for quite a tough summer because that trade-off between inflation expectations and growth is quite a tough one for stocks to absorb while central banks are going so hard at inflation.
But at some point we are looking at maybe building some exposures back up and we come at it from a very nice position in a way because TAA performance is positive so far this year. So we haven't been blown out of the water by all the extraordinary moves. And overall portfolio performance has been really pleasing as well. So we come at it from a position of strength and rather than being forced to make trades that we don't necessarily want to, we are in a position where we can evaluate lots of very interesting alternatives.
And I don't think at the moment, I may be wrong, there’s not a huge rush at the moment given the way the economic data is going, the economy is continuing to swoon as you'd expect under the pressure of huge jumps in interest rates, tightening in financial conditions, in the US a gigantic fiscal drag, so we've got a very challenging immediate context.
But as you get into next year that may ease up a bit and I think as you know, markets are anticipatory assets, so at some stage it's going to be a good moment to potentially add to risk, but that's not quite where we're at just yet. But we're still evaluating lots of very interesting opportunities.
PA: Thanks, Will. So a little bit of patience over the summer and hoping for a second half that is a little bit better than the first. Thank you also to our listeners for joining us today and our viewers. If you would like to hear more from us before the next Monthly Market Insights, please do seek us out at our weekly podcast Word on the Street where we share all of our latest views on developments.