A challenging summer ahead?

As temperatures rise, markets set to cool

17 June 2022

Our Chief Investment Officer talks about the US, Europe, and China and what the future may hold.

The current landscape

Amidst still very volatile capital markets, it remains the outlook for the US economy that investors need to concentrate on. As the sharp falls in the world’s stock markets suggest, the outlook for the world’s largest capitalist economy has deteriorated in the last month or so. Some of this slowdown is welcome. Incoming inflation data continue to show the economy running too fast for the available supply. In this context, it may be a few months yet before we see the return of a friendlier central bank community. This suggests that investors would be wise to expect a continuation of the unsettled markets we’ve seen so far this year.

It remains a very disorientating backdrop for investors. Stocks and bonds falling in unison have led to some very challenging outcomes for many investors to absorb. Our most diversified multi-asset class products have continued to benefit, both in absolute and relative terms, from the increased exposure to diversified commodities, as well as the refined allocation to alternative strategies. These asset class exposures allied to the fact that we diversify across investment styles (so we own value as well as growth stocks), have been very helpful in the current market context.

The overall message remains the same. Your long-term investment returns are unlikely to be materially altered by anything happening this minute. They will instead anchor to the medium to long-term prospects for global productivity growth. Here there is much to be excited about thankfully, sufficiently so to make investing today in a diversified fund or portfolio a worthwhile bet.

PHILIP ATTREED: Hello and welcome to the June episode of Monthly Market Insights. I'm Phil Attreed, Barclays Head of Wealth Specialists. And as usual, I'm joined by Will Hobbs our Chief Investment Officer.

Now, Will, it's been another turbulent month across investment markets and whilst I'm sure it's very stimulating for the investment teams in their day-to-day work, investors I think are probably looking forward to the episode where I'm going to be able to stop saying that.

WILL HOBBS: 100 per cent, Phil. I can't say it's going to come anytime soon, I'm afraid, but yes, I agree.

PA: I get that feeling as well. But anyway, Will and I are going to have a go as usual unpicking what's going on in the world.

Also what the path ahead might look like and so hot topics really continue to be about oil, inflation, central banks, and I suppose a little bit more about the hunt for stock and bond opportunities that might be out there particularly at current levels.

So, Will, could you set the scene for us if you can?

WH: Phil, that's not easy question actually more and more difficult than usual.

I'll try and do like a brief world tour because each region is facing its own set of quite individual challenges some of the same ones as well, but with quite individual toolkits as well.

So if you start with the US because that's still by miles the most important for us as we know in terms of the outlook for investment markets. If you start there, the good news is that the data is okay.

The economy is slowing, but you want that to be the case. That sounds perverse but as we've explained before this is what central bankers are trying to achieve.

This is what mostly people want to achieve in order to try and reconnect aggregate demand with aggregate supply so that you get this inflationary pressures under control again, but, they need to cool demand for everything basically, for workers, for goods, for services.

But incoming economic data, the latest batch of data suggest that the US economy has quite a bit of cooling to do before the central bankers will feel relieved enough to stop trying to get interest rates up at such a sharp level.

Europe has a job to do too on this front, in terms of that inflationary story. That's the same thing really at work for somewhat subtler different reasons but they've got obviously the added complication of the unfolding tragedy in Ukraine and proximity there and everything that's going on there obviously creates a much more uncertain outlook for the European economy.

 If you think about if the gas supply which still could be cut off that plunges Europe into an immediate economic darkness and that's not quite foreseeable very easily calculable in terms of the odds that that might happen. So you want to be wary of overconfidence there.

In China, they're continuing to, the policymakers continue to play ‘Waco mole’ against Omicron which as we know is a much more transmissible variant, it's proving difficult as the news from Shanghai this week suggests and there you've seen a very sharp deterioration in economic activity because of that battle and that's made things very difficult in the short run there.

Further out, you should see a bounce back, activity inevitably will bounce back but we've said before that the outlook for China is difficult as well.

 It's like I say, it's really very different outlooks and different regions and the big story on the consumer side is this excess savings pile that we've talked about before: how will that be deployed to what extent will it be deployed and region to region?

In the US it's perceived to be a bit more evenly distributed across households and therefore maybe a bit more likely to be deployed and the latest spending data showed that that was a little bit the case.

They're dipping into their excess savings. That's a little bit more questionable in Europe, UK as well. The perception here is that it's a bit more unevenly distributed, more clustered in the top 40% by income distribution and that has a different outcome in terms of what you would expect to be spent, if that all makes sense.

PA: It does indeed. You made reference a couple of times there but the big question at the moment appears to be when we're likely to see the friendlier side of central bankers again.

WH: Yes, it'd be nice wouldn’t it? It feels a long way away right now. It's amazing to think, if you look at this year from a little over a year ago and you look at what markets and most were expecting at that stage and forecasting for 2022, it was really about central bankers sitting on their hands for much of it, still in nurture mode, trying to nurture the economy back from the blows of the pandemic.

And yet you fast forward to today and you have got quite the opposite; you are already in the US deep into rate-rising cycles, you've got coming in the US, the next few meetings are expected to be again chunky rate rises. They’re going to be a good deal higher by the end of the summer.

The question mark for investors, like you say, there is: when do those central bankers not just stop raising interest rates, but when do they change their communication a little bit? That will be the thing for investors to watch.

There’s not much sign of it at the moment and you want to be a little bit wary, the energy prices are now pushing out some of those expectations with regards to the plausible peaking inflation even in the US. So it's a very complicated backdrop there. I suspect a tough summer ahead. That's the current expectation. That could change, like I say, but that's our current base expectation.

PA: And I suppose with that in mind, it'd be pretty tempting to certainly wait until making any substantial increases to stock markets to equity exposure. Would that be fair?

WH: Yes, so it's interesting isn't it? Because a lot of people will look at pullbacks of the size we've seen and look at it and say that's naturally tantalising.

If you look on a probability basis you look at the size of the pullback relative to historic pullbacks you would say that buyers would get interested. We would say it's not as easy as that really, the outlook as I've described is sufficiently complicated to be relatively low conviction.

 That's reflected in our Tactical Asset Allocation book; there's a batch of short-term positions the team focuses on to try and add those little performance cherries here and there to the overall SAA performance cake, the Strategic Asset Allocation cake.

But what you can see there is that the book is what's called relatively flat. We're not, there's not massive positions at the moment. The team is scouring the world for opportunity. But at the moment it's discretion is the better part of valour.

Like I say the outlook for central banking and inflation, it's so uncertain at the moment and it is very, it's dictating, it’s a really strong market influence at the moment that inflation story and the uncertainty that surrounds the short-term outlook there should mean that for the moment anyway, we're more cautiously positioned in that tactical book.

PA: Yes, not a time to be too bold just yet. But I guess one positive to take out of the start of the year and some of the moves that we've seen both in stocks and bonds is that the return prospect I suppose maybe for the years ahead maybe look a little bit more attractive than they have done in the past. I think you'd made reference that a little bit in what you just said.

WH: Yes, this is a little bit, in these very difficult times, I guess this is a weird thing, but this is an investment video, isn't it? But yes, you're right. I think your expected returns probably are a little bit higher than they were. The backup in bond yields is helpful there. Stocks have fallen some distance in some corners as well.

So there's less froth and we talked in our outlook actually about the need for some of that froth to get blown off markets at some stage. As always when it comes it's more shocking than writing about it in advance or speaking about it in advance.

 But yes, the expected returns are higher and that really is always the finishing point for our conversations. You must be so bored of hearing it by now but hopefully it gets through. Repetition, I hope, and conviction, it's my personal belief as well, is that there's no point in getting too caught up on what's going on right now in a very confusing tactical backdrop.

The returns to longer term investments that's just about making sure you're fully invested all the time. Don't worry too much about what's going on in the short term. These are fluctuations. Your entry point right now as in days and months won't make a big difference in terms of your long-term returns expectation. Those short-term tactical tweaks, that's more about adding basis points here and there.

Like I say the meat and drink of your returns is just going to be from being invested and having faith that over the long term, humankind will continue to invent new stuff and get better at using that new stuff, productivity. And that was what will drive your returns and as you know, I have strong faith that will be the case, we can go through that on another podcast again, but I think that's the major point to take away as usual.

PA: There’s always certainly interesting things going on in the world. Will, thank you as always, very insightful and thank you our viewers and listeners for joining us. If you would like to keep in touch with our views over the course of the next month between episodes, please do seek us out on our podcast Word on the Street where we share all of our latest views on developments. 

A challenging summer ahead?

As part of our aim to keep clients and customers informed of our current investment views and how these themes are impacting our portfolios and funds, Phil Attreed, Head of Wealth Specialists, talks to Will Hobbs, Chief Investment Officer, about the US, Europe, and China and what the future may hold.

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