Dialling down the risk

How can markets keep staying so positive?

19 June 2020

Our Chief Investment Officer discusses the rising markets in the face of mounting geopolitical tensions and global crises.

The current landscape

We think there are a few reasons for the markets’ positive performance over the month. Firstly, there is mounting evidence that those countries in Europe and US which have relaxed containment measures have not seen an associated spike in the coronavirus infection rate. Secondly, the recovery seen in high frequency indicators, from geolocation statistics to electricity consumption, are pointing to a much brisker recovery in economic activity than many people had been anticipating. Meanwhile, in Europe, the rescue package and the potential for mutually backed euro debt has also been helping to buoy investor spirits.

With regards to the continuing US-China trade tensions, we believe that both sides are likely to want to preserve whatever economic pep they can lay their hands on, in the short term at least. We also expect the presidential elections in November to help stay the White House's hand from escalating the situation any further.

In terms of tactical positioning, the recent rise in investor sentiment has prompted us to take some risk off the table. We have removed our overweight to developed world equities and added to developed world credit, specifically higher quality credit. We think that strong central bank support should continue to drive demand for credit.

As ever, we recommend investors get invested, stay invested and stay diversified.

Dialling down the risk

As part of our aim to keep clients informed of our current investment views and how these themes are impacting your discretionary portfolios, Phil Attreed, Head of Investment Consulting, talks to Will Hobbs, Chief Investment Officer, about recent market performance and changes in portfolio positioning.

PHIL ATTREED: Hello and welcome to this June edition of monthly market insights. I'm Phil Attreed, Barclays Head of Investment Consulting. I'm joined today by Will Hobbs, our chief investment officer, and as usual we'll spend the next few minutes just talking through some of the news flow of the past month or so and our take on it. Will, the first thing that's really striking about the last month is just how well stocks and other riskier investments have done. Yet as I watch the news, as I read my usual sources, they don't feel anywhere near as upbeat and positive as markets have been over the last month. We've seen violent protests in the US, worsening tensions between the US and China, and obviously the global loss of life from coronavirus tragically keeps on rising across the world. I guess the question I'd have have for you, Will, is whether or not markets are increasingly becoming disconnected, detached from reality. 

WILL HOBBS: Yes, Phil, it doesn't really feel like there's much to smile about at the moment does it? But I think from the markets’ perspective, remember the drivers here can be quite different because markets are forward-looking and so they've incorporated a lot of the bad news that’s out there that we’re seeing, not all of it obviously. But I think the two things that have been driving markets higher this month, the couple of primary things that I think investors have been seizing on: one is there's mounting evidence that the countries and states in Europe and US, that relaxed containment measures earlier, have not seen an associated spike in the infection rate just yet, that’s the first thing. It's early days yet, we’ve got to continue to watch that but people are taking a little bit of optimism from that sign so far. The second thing is the recovery and activity described by those high frequency indicators that you and I have talked about before from geolocation statistics all the way up to electricity consumption, they are pointing to or they seem to be describing a much brisker recovery in economic activity that many people had been anticipating. Meanwhile the news out of Europe, with regards to the rescue package and the rising potential for mutually backed euro debt, that's also been helping to buoy investor spirits a little bit. So I think we can say that the rise that we've seen is not without foundation, there has been some more positive stuff going on beneath the bonnet to adjust people's expectations a little bit. 

PA: All very useful context, but do you feel that as markets, particularly stock markets, tick higher and higher nowadays, is there a risk for disappointment, a risk of potential for pullback, and is that risk rising? 

WH: Yes, what goes up, must come down feeling isn't it when we look at these things? I think it's always difficult to tell and generally you would need to identify a future trigger of some sort and that would imply that I know or you know or we know a lot more about the future than we can genuinely lay claim to. However, what we can say is that investor sentiment as measured by our proprietary gauge and others have similar tools. It's gone from being pretty despondent back in the end of March or implying a lot of investor despondency to fairly giddy levels that we see today. Now just as investor sentiment back in March indicated that the capacity of market prices to absorb new good news was relatively limited without having to see a big surge in prices, you probably say the reverse is true right now. So the capacity, the cushion to absorb new bad news in markets as implied by the sentiment indicator, suggests that it's a pretty thin cushion at the moment and as we know, there's plenty of sources where bad news can come from and actually we've responded to that in our TAA (Tactical Asset Allocation) by reducing our exposure to stocks a little bit. 

PA: Great I'll touch on that with you in a minute. The falls that we saw, the volatility that we saw in March and early April, that's not the only volatility we've seen in more recent history. Obviously late 2018, early 2019, we saw those US-China tensions the knock-on effect to sentiment more broadly in markets and I think investors would be forgiven for being worried about mounting tensions if that were to come back to the fore. What's our view on how the US-China position might play out from here? 

WH: Yes, I mean there's a lot of speculation going on at the moment. We can't say with any great authority, it's not an area we think we see ourselves having an edge. This was the same comments we used to make back in 2017-18 when we watched this saga. What we would say, what many are arguing, is that both sides are felt to want to preserve in the short term at least, preserve whatever economic pep they can they can lay their hands on. To that effect there are many speculating that you might see tension stop short of measures that would actually really hinder the economy at the moment. Some are citing that presidential elections in November may stay the White House's hand a little bit, we shall see. Like I said it's not an area we have an edge. That does make sense to us in a sense that there is  a degree of economic self-interest that will help this in the short term. Basically we're desperate for diplomacy to play its role, but this is not an area like I say where strong convictions should be held.

PA: And Will, finally, for those viewers who are invested with us or those seeking reassurance who are thinking of investing with us, could you just touch on what you and the team have been focusing on tactically in the recent market conditions? 

WH: Well it's been busy, Phil, and as you know, every time we have this, you and I do this Zoom update, it's busy every time. And unfortunately when we're busy, the team that does the asset allocation, the tactical asset allocation, it makes everyone else busy as well because there are huge downstream implications for all those teams that have to implement. It's a very complicated process. We’ve been keeping large chunks of the business busy. We talked last time about adding risk right at the bottom of markets and we did that relatively successfully. We added to stocks almost exactly at the bottom of markets actually, which is more luck than anything, but we certainly got that more or less right. But since then, that rise in sentiment that we just described that's prompted us to actually want to take a bit of risk back off the table. So we've actually removed that overweight to developed world equities and we've put a little bit back into developed world credit, so higher quality credit, where we just see there being an attractive asymmetry still because there's still very strong central bank support for those areas of the market. And that suggests that it's just a slightly, it's a better asymmetry, or a better risk reward let's say, in credit at the moment, both junk and higher quality in our opinion, than it is for developed stocks and that's reflected in our tactical portfolio, our shorter term portfolio. 

PA: Good to see that activity coming through and clearly that leave us, for those investors, in a fairly balanced position but possibly lending a little bit more rather than investing in those high quality companies themselves. Thanks, Will, reassuring thoughts and insights from you and the team as always. That just leaves me to thank you, our viewers, for joining us. If you would like to hear more from us before the next monthly market insights, please do seek out our weekly podcast word on the street, where we share all of our latest views on development as they arise. Otherwise we look forward to you joining us next month.

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