Can vaccine hopes drive equities higher?

Key points:

• Equities recent strength seems to rely on hopes of a vaccine. Even if one is soon, it may not lift growth quickly
• Any excitement about potential government spending plans on infrastructure projects should be tempered
• The narrow market leadership among Tech stocks suggests little irrational exuberance exists among investors, though there are risks
• It may be time to be more selective in the regions, sectors and stocks being targeted. 

Despite many local spikes in COVID-19 infection levels being seen in North America and Europe, equity valuations have been extremely resilient since March’s sell-off. While hope can be a strong force in financial markets, investors’ seeming belief in a quick economic recovery and COVID-19 vaccine being found relatively soon may soon face a day of reckoning.

Finding a vaccine is the first challenge. One that could take several months or years. Factor in the expected gap between finding a vaccine and immunising populations and the timeframe lengthens. Investors should not expect a vaccine to quickly accelerate economic momentum significantly.

Skyrocketing government spending

The level of support provided by governments to shield the economy from much of the effects of the pandemic has been massive. Investors expect administrations to maintain some level of support to help businesses through the pandemic.

The prospect of large infrastructure spending plans by governments as part of the pandemic economic recovery package seems to excite many investors in Europe and North America. However, caution may be called for. Even if the plans see the light of day, they are unlikely to help lift activity before 2022 at best.

Central banks join in

Central banks have joined the pandemic support efforts, intervening like never before through low interest rates and more quantitative easing. Such aggressive policies seem set to be active for several months, if not years.

While it now appears that there is virtually no limit to authorities’ interventionism, both the US Federal Reserve and the European Central Bank seem willing to “wait and see”. Investors may eventually get what they want in the form of looser policy, this might not happen until there is a sustained fall in equities or financial conditions tighten too much. Reassuringly, the performance of various asset classes and equity sectors suggests that a strong recovery is not being banked on.

Beware crowded Tech trades

The strong recovery in equity prices since March, belies the narrowness of the rally in terms of the number of stocks driving the performance: the rally has been driven almost exclusively by a handful of “growth” companies with resilient earnings and limited correlation to the worsening economic backdrop. By contrast, more cyclical groups, such as banks or industrials, which tend to perform well in the recovery phase of the economic cycle, lagged in July.

While the narrow market leadership encouragingly suggests little irrational exuberance exists among investors, in turn it poses downside risks should the trend reverse. It could be time to take a more prudent, cautious approach and be more selective in the regions, sectors and stocks being targeted.

More diversified, quality portfolios

Diversifying away from crowded trades, such as technology stocks, to find high-quality and under-owned securities. Rather than tweaking portfolio allocations between value and growth or cyclicals and defensives, a focus on quality is about looking for businesses with solid balance sheets, attractive cash flow and sound growth prospects, irrespective of sector. As such, and with volatility and return dispersion between assets likely to be relatively high, upping exposure to actively managed assets and private markets in attempting to lift returns has attractions.

Related articles

Investments can fall as well as rise in value. Your capital or the income generated from your investment may be at risk.

This communication:

• Has been prepared by Barclays Private Bank and is provided for information purposes only
• Is not research nor a product of the Barclays Research department. Any views expressed in this communication may differ from those of the Barclays Research department
• All opinions and estimates are given as of the date of this communication and are subject to change. Barclays Private Bank is not obliged to inform recipients of this communication of any change to such opinions or estimates
• Is general in nature and does not take into account any specific investment objectives, financial situation or particular needs of any particular person
• Does not constitute an offer, an invitation or a recommendation to enter into any product or service and does not constitute investment advice, solicitation to buy or sell securities and/or a personal recommendation.  Any entry into any product or service requires Barclays’ subsequent formal agreement which will be subject to internal approvals and execution of binding documents
• Is confidential and is for the benefit of the recipient. No part of it may be reproduced, distributed or transmitted without the prior written permission of Barclays Private Bank
• Has not been reviewed or approved by any regulatory authority.

Any past or simulated past performance including back-testing, modelling or scenario analysis, or future projections contained in this communication is no indication as to future performance. No representation is made as to the accuracy of the assumptions made in this communication, or completeness of, any modelling, scenario analysis or back-testing. The value of any investment may also fluctuate as a result of market changes.

Barclays is a full service bank.  In the normal course of offering products and services, Barclays may act in several capacities and simultaneously, giving rise to potential conflicts of interest which may impact the performance of the products.

Where information in this communication has been obtained from third party sources, we believe those sources to be reliable but we do not guarantee the information’s accuracy and you should note that it may be incomplete or condensed.

Neither Barclays nor any of its directors, officers, employees, representatives or agents, accepts any liability whatsoever for any direct, indirect or consequential losses (in contract, tort or otherwise) arising from the use of this communication or its contents or reliance on the information contained herein, except to the extent this would be prohibited by law or regulation. Law or regulation in certain countries may restrict the manner of distribution of this communication and the availability of the products and services, and persons who come into possession of this publication are required to inform themselves of and observe such restrictions.

You have sole responsibility for the management of your tax and legal affairs including making any applicable filings and payments and complying with any applicable laws and regulations. We have not and will not provide you with tax or legal advice and recommend that you obtain independent tax and legal advice tailored to your individual circumstances.

THIS COMMUNICATION IS PROVIDED FOR INFORMATION PURPOSES ONLY AND IS SUBJECT TO CHANGE. IT IS INDICATIVE ONLY AND IS NOT BINDING.