Phil: Hello and welcome to this September episode of Monthly Market Insights. I’m Phil Attreed, Barclays Head of Investment Consulting. Once again I’m joined by Will Hobbs our Chief Investment Officer as we explore what's been going on in the world of investing. So as many clients, colleagues, and investors turn their attention to long-awaited summer holidays, it seems investment markets thankfully seem to have largely behaved themselves over the last couple of months. But was there any news flow that caught your attention, Will?
Will: Yes, they behaved better than our children, I have to admit towards the end, who started to fall out after a too-long summer holiday so it's time for them to go back to school.
But I think if you look at markets, Phil, quite a lot of the focus has been on the Delta variant, that much more transmissible strain of COVID and that's put under a lot of duress those zero COVID strategies and it's also led to some worrying data points.
The UK is as we talked about before is patient zero in this one, so people are watching very carefully to see the economic impact of Delta and how at least for a highly vaccinated or high immunity economy and how it fares amidst the Delta strain.
Actually if you look at the news from the UK has been relatively encouraging on that front; we'll see what happens when the schools have returned, we'll see what the data does post that. It's obviously a much more difficult story so far Delta for those less vaccinated areas particularly in emerging markets.
The other piece of news that certainly caught my eye anyway was that regulatory crackdown in China which nominally is part of a drive to even up the distribution of wealth and opportunity in China. And actually in that context that's part of a story that's made it quite a tough year for emerging market equities so far.
All told, looking at it through the lens of both asset class moves and indeed what's been going on underneath those asset classes, the sense you get is that investors around the world have slightly trimmed their expectations of global growth from that very positive first quarter.
So growth is certainly peaking unevenly around the developed world, you're seeing that in the data points. But what lies beyond that peak is not looking too shabby at the moment. So that's broadly it; it remains a complicated picture doesn't it, I think that the way to put it.
Phil: It does. It’s been a quiet summer for the markets but still work to be done as you say and the investment team here at Barclays have made a few minor adjustments over the summer and that leaves the portfolios that we run on behalf of clients, I suppose, Will, what you would call relatively neutral from a tactical position.
And so is it fair for me maybe to interpret from that basically that means that in the short-term view, the team are maybe not seeing so many opportunities over and above the returns that they might see from a strategic view, that being the long-term asset allocation that we would normally apply to our investment portfolios?
Will: Well Phil, you put it a lot clearer than I ever would, so thank you for expressing it like that. I think that's accurate and I think you've got to start from the perspective of or you start from the base assumption when you're looking at markets is that markets are efficient.
What I mean by that as we've described before is that new news is incorporated quickly and efficiently into market pricing to reasonably accurately reflect the range of probabilities out there on any particular event or a specific area.
Now that's reasonably well-established academically and statistically. So that's got to be your starting point. If that is your threshold, then you've got to be ready for periods where the prevailing thing is to sit on your hands a little bit and just look for opportunities. I don't think you start from the position of “I have to have a tactical position”, “I have to have bets on at all times”. I think that's part of the discipline.
Now if you look at the performance over the last decade of our Tactical Asset Allocation, you can see that the team are good at finding the opportunities when and if they arise. But I think part of that discipline is also knowing when not to stretch yourself and when not to have a position for the sake of having a position.
Phil: It’s really a case of just letting markets do their job but you know what I’m going to ask you next though, Will, with us being tactically neutral.
And it always seems maybe the obvious question for our clients to ask in this situation: does that mean we can or should wait to get invested if we have got new money to put into the markets?
Will: Well, Phil, I’ll probably need you to translate my garbled thoughts on this as usual because it's a really difficult concept to get your head around; it’s how can you plausibly have a different view of, say, stock markets on a three- to six-month view versus a long term view particularly if you sensibly admit that you have very little visibility over either time frame in reality.
I think there's a couple of things to really talk about here is: one, it's really about conviction and the level of conviction which you can muster. So if you look at how we design the Strategic Asset Allocation and what it's for, and you should think of these two activities entirely differently, they're entirely different investing disciplines Strategic and Tactical Asset Allocation, short term/long term and we deploy very different techniques in order to make the most of the opportunities out there.
With regards to the Strategic Asset Allocation, just remember that, you know I’ve talked about this a lot, that really we can't know what lies ahead on a 5-to 10-year view.
But what a careful study of history suggests that we are right in assuming that growth is the norm not the exception and that we should position for such a thing. But we can't know when and where that growth is going to take place exactly so we want to be sitting in wait, ready with our Strategic Asset Allocation to try to prepare ourselves and be ready to take advantage of all opportunities out there and that as you rightly say that's the driving force of portfolio returns, that's where most of your assets will be allocated to.
Now the next bit and this is where the conviction comes in, your tactical allocation is really about those short-term tweak. Like we said before there's some opportunities and even those efficient markets crop up to be able to add to that return but that necessarily should be a much lower conviction activity. You don't want to be going all in, all out based on that kind of thing. That would be mistaking or massively exaggerating your ability to see the near future.
So what we do is we tend to do this at the very fringes of the portfolio and try and add literally tens of basis points a year because we feel that 50 to 75 or whatever we can generate basis points a year compounded over time is an incredibly powerful extra tool of returns.
But and this is the most important point to try and time, to try and do Strategic Asset Allocation or try and bring all of your assets into play and invest according to a tactical framework by going in and out and saying, “now's the time to invest, I can really see it”, that's massively exaggerating your ability to see the future.
So just remember that Strategic Asset Allocation is about designing a broad net where you're trying to capture as much of the opportunity set out there; the tactical is really just about adding little bits of alpha, what's it called, extra returns here and there.
It's the same thing with regards to manager selection; we wouldn't just own one stock in America and hope that that was going to do it for us. What we try and do is pick managers that will give us little bits of advantage here and there and take advantage of those little mispricings and opportunities out there to add again tens of basis points on top of that Strategic Asset Allocation.
Phil: Finally, what about the near-term outlook from your perspective? It's maybe not just politics on the home front and it's certainly been grabbing headlines this week. But it isn't just about the home front.
For a start, we have looking at the news channels this morning, we've got some quite exciting looking German elections coming up soon as well I believe.
Will: Yes, and you're right, the home front is always interesting to us isn't it? But we've got to remember that in terms of how it influences portfolio returns, the UK economy is just not that important. Even the UK political situation is not that important for a globally diversified investor.
Yes, German elections, you rightly say, they're at the end of the month and polling suggests you've got a highly fluid electoral situation, as you say. Nonetheless a high degree of policy continuity is still likely for the most part, looking at the currently viable coalition options; and remember this is a very fragmented political landscape at the moment.
But remember, even nuances in how Germany views its role in Europe, for example, or indeed fiscal behaviour, those things could be very important and obviously there's the end of Frau Merkel's incredible reign at the top of European politics and that's naturally the focus of many at the moment.
Otherwise really what we're doing at the moment with all data points and everything coming in, you're just trying to steal glimpses of what the post-crisis global economy looks like. And remember as we say regularly, much remains up for grabs here in truth. And our view continues as you know to be obscured by the fact that, first and foremost, we're still right in the middle of this pandemic, which is still far from being over. And with all the distortions that that brings.
In the near term, we'll be looking out for in the US and the UK and Europe, what back to school means in terms of transmission and looking at what's going on there. Labor Day as well in the US may have been a spreader event, we'll see what that means for the statistics. And obviously if we approach traditional flu season when medical facilities become a bit more congested, that's something else to watch.
So again we hope for a much less complicated winter than last time but this pandemic is far from over and we still should, as investors and citizens of the world, worry about the sting of variants in the pandemic's tail.
There's cause for optimism there does seem to be the economy learning how to, certain aspects of the economy seem to be learning how to coexist with the pandemic and we all seem to be getting a bit more use to it. But just remember that there's a way to go and there's some caution which is necessary.
Phil: It does feel like every phase of the pandemic brings an adjustment to a new norm if you like it, a well coined term but probably very apt at this time.
Thanks, Will, always useful insights from yourself and thank you to our viewers and listeners for joining us again today.
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 on all the usual platforms where we share many of our latest views on various developments across investments and the world. Otherwise, Will and I look forward to having you back with us next month.