5 November 2008: Recession not depression, says Barclays Wealth, but equities may have further to fall

The November edition of the Barclays Wealth Signpost monthly update, ‘How far down?’, reports on recent market events and policy initiatives, identifying risks and opportunities over short-, medium- and long-term time horizons.

Michael Dicks, Head of Research and Investment Strategy, Barclays Wealth, said, “We don’t think that a 1930s-style depression is likely. But the recession is likely to be more prolonged than any of the last few decades. Don’t expect a recovery until the second half of 2009, if we are lucky. Equities should recover before the economy does – usually they do so several quarters before GDP turns around. However, they may struggle to get any traction through the remainder of this year.”

Barclays Wealth believes that there are three ‘A, B, C…’ scenarios that could now play out.  First, an ‘awful’ outcome, comprising a brief and relatively shallow recession, from which the economy emerges essentially intact. Second, a ‘brutal’ outcome, a deeper and longer lasting downturn. Third, a ‘catastrophic’ outcome, a depression in which GDP collapses.

Barclays Wealth estimates the probability of a full blown depression at only around 10% at most. Reassuring factors include the recent easing of the gap between interbank and official rates, and the likelihood of substantial further monetary and fiscal policy interventions.  But this does not mean that the recession will be short-lived. The financial markets will take some time to mend, and hence for trust to return. The likelihood is that the fundamental factors dragging down household consumption – falling house prices and real incomes – can be reversed from next summer onwards. Even so, the most likely result is somewhere between the ‘austere’ and the ‘brutal’ scenarios.

ompared with previous UK and US business cycles, activity has so far held up quite well. But Barclays Wealth doubts that this will last long. Recoveries usually start four or five quarters into the recession. This time around, recovery might have to wait until the sixth or seventh quarter – in other words, towards the end of next year.

With more poor macro-economic data likely, it will be a hard slog at best for the equities markets. Policy intervention will gradually unfreeze markets, and restore some faith amongst investors, but the process will take time. Historical experience suggests that equities tend to bounce back quickly after a crash, but it might take a while to identify the turning point. So, for the moment, Barclays Wealth remains neutral on equities on a short-term (up to three-months) time horizon. It expects the US equity market to outperform other markets, but believes that emerging markets will continue to struggle in the short term.

Barclays Wealth expect corporate credit spreads to narrow in the medium term, but recognises that they may make little headway short term given the impact of the deteriorating macro-economic backdrop on firms’ viability. Much will depend on the continuing measures to unfreeze markets, and how successful these prove to be. Barclays Wealth continues to recommend going long duration government bonds.
Over the medium (one year) and long-term, Barclays Wealth maintains a small equity overweight. It suspects that markets have overdone the ‘doom and gloom’, and will eventually recover some of their lost ground – but argues that this does not sound like a story for the short term.

Download the full report:
Signpost Monthly Update, November 2008: How far down?  [PDF, 2.87 MB]

To arrange an interview or for further media information:
Barclays Wealth
Nicola Hankey, Head of PR
020 7114 9813 / 07775 548418

Jignasa Patel, PR Manager
020 7699 2483 / 07500 953 280