An unprecedented policy response

What are the long-term effects of this pandemic?

24 September 2020

Our Chief Investment Officer talks about the long-term effects of the pandemic and the latest changes in portfolio positioning.

The current landscape

Although global equities remain in positive territory despite the world economy experiencing a record-breaking recession, we believe that talk of a ‘bubble’ is misplaced.

In terms of the long-term effects of the pandemic, it is difficult to say whether we should expect a sustained period of low growth and low inflation. What we can say is that the policy response to this crisis has been unprecedented compared to previous crises and is likely to have a significant impact on the ongoing economic backdrop.

With regards to portfolio positioning, we have focused very much on equities early on in this crisis when we added equity risk to portfolios. Since then, we have increased our credit risk to capture opportunities in this space. More recently, we have dialled back one of our positions in high quality developed world credit and moved the proceeds into emerging market debt.

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

An unprecedented policy response

As part of our aim to keep you 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 the long-term effects of the pandemic and the latest changes in portfolio positioning.

Phil: Hello and welcome to this September edition of Monthly Market Insights, I'm Phil Attreed, Barclay's Head of Investment Consulting. I'm joined today by Will Hobbs, our Chief Investment Officer. As usual we'll spend a few moments talking through the news flow of the past month and what might lie ahead for investors. So Will, I have to admit it continues to feel a little strange to me right now: we're here in September, my children are back at school, but things feel far from normal. The world economy is experiencing a record-breaking recession and yet global equities are in positive territory. There has been a bit of a pullback in US equities, US markets, recently but unsurprisingly I'm still hearing a lot of concern about bubbles amongst our clients. Is that something that you and the team are concerned about, anything that you're worried about?

Will: Well, Phil, you're always concerned about bubbles. The only thing I would say is that bubbles tend to be a lot rarer than many of the sensationalists and commentators would argue. It's very popular headline: "We're in another bubble". But often the truth is a bit different. If you look at actually historically, and you know how much I love banging on about history, but if you looked historically at the evolution of prices, market prices, there was a famous study by a Professor Goetzmann of Yale who looked at hundreds of different countries and years, decades of equity market performance, and he put it all together and looked at the probability of a market experiencing sharp declines after a sharp rise basically, so suggesting trying to find how often bubbles did actually exist. And interestingly enough his study found that a market doubling in price was twice as likely to be followed by another year of strong gains than actually a year of retrenchment. And I guess the point there would be that quite often we want to probably assume that investors are not away with the fairies as often as some of the commentators suggest.

Phil: Okay well so that's history. But what about today?

Will: I think the real thing to just remember is the perceived size of that cash flow mountain. That's the thing to keep in mind.  That's really influenced by what else you can do with the money, that investment, and so when you're thinking about it, if interest rates are very low as they are right now, then that does flatter the size of that that mountain of corporate cash flows that lies ahead, and if we're just thinking specifically about those Tech-ish names that we're talking about in the US at the moment, that people are worrying about, just remember that the comparisons with 1999-2000, it's a very different context right now. Yes, there is a very concentrated market and yes some of the cash flow assumptions you need to make in order to justify the current levels that you're seeing in those stocks we would say that they leave very little margin for error but that doesn't again, that's not a bubble, that's different. That's something that looks a bit expensive and we would still own some of that exposure but just with everything else as well.

Phil: Thanks Will. So we're come on to that interest rate point next. I note that attention is understandably turning to the long-term effects of the pandemic and I've seen some headlines from an academic paper that some of the central bankers seem to be citing about the global economy's response to past pandemics, stretching back over centuries. And the conclusion seems to me at least to suggest expectations of low growth, lower inflation, for quite a sustained period of time, decades even. Would you suggest that the low interest rates that you speak of are maybe here to stay?

Will:  Well, Phil, I mean it wouldn't be, you wouldn't want to bet your life on it. I think that would be the way to put it. This study, it's a very interesting study, but the authors themselves point out some of the shortcomings with the comparisons of pandemics going all the way back to the Black Death and the aftermath with the modern economy. The reality is that: it's always different this time. They sound like, they use the more four most dangerous words in investing, but it's the truth unfortunately. And right now, if you think about it, in the comparisons with previous years and pandemics where life expectancies were much shorter and all sorts of other factors were very different, that dims or that should dim your ability to make strong comparison with those periods, I think. Nonetheless, it's an interesting study, it should be an input into our thinking about the future, and that's certainly one of the scenarios that you could say is that, and that's certainly what a lot of the policy makers are looking at. I think that's probably the most important difference that we're seeing today versus previous eras and previous crises, that's the policy response. We've really seen something more muscular, more immediate than you've seen in any crisis past and that's that monitoring fiscal policy response that does shape a little bit how you should think about the future and the future of interest rates. And certainly we would not want to you know organise our assets along the lines of only assuming that interest rates and inflation were going to remain low forever. We want to organise our multi-asset class portfolios and funds more robustly than that to plan for the idea that the future doesn't have to be just a continuation of the recent past. There are myriad other potential outcomes as well. And that policy response like I say has the potential to change the regime we're in and I think that's something that's worth considering for investors.

Phil: Finally, what have the team been doing in our client portfolios over the summer, you certainly seem to have been keeping everyone on their toes as we've seen various investment assets continue to break new ground?

Will: Yes, it's been busy, Phil. As we've spoken about before and you know when the Asset Allocation team is busy, unfortunately it has also or fortunately, it keeps everyone else busy downstream as well. There's a huge amount of work that goes into implementing trades and so on and doing so in a timely and accurate fashion. And so it's a huge group effort to get these things done as well as the teams have done this year. What we have found is we've, having sort of focused very much on equity and equity risk early on in the crisis back in March when we added quite a lot of equity risk to portfolios at that point, we then switched as you know more to a focus on credit risk and some of the opportunities in that space. We've since dialled back one of our credit bets in high-quality develop world credit. We've brought that back to the benchmark level and we've moved some of that into emerging market debt where the teams still see a little bit of an opportunity there. Like I say, these trades are at the edges of the portfolio, they're about adding little performance cherries on top of the performance driven, delivered by the overall mix of assets that we call our Strategic Asset Allocation. And happily the team, they've done a great job over a number of years and so they've persistently managed to add to performance this year so far no different. So it's been a great effort from the teams so far this year on that front.

Phil: Thanks, Will, useful insights as always. That just leaves me to thank you, our viewers, for joining us. If you'd like to hear more from us before the next Monthly Market Insights, please do seek us out on the weekly podcast Word on the Street where we'll share more of our latest views on developments. Otherwise we look forward to you joining us again next month.

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