Multi-asset portfolio allocation

02 August 2019

3 minute read

Barclays Private Bank discusses asset allocation views within the context of a multi-asset class portfolio. Our views elsewhere in the publication are absolute and within the context of each asset class.

Cash and short duration bonds: neutral
  • Our preference for higher quality, liquid opportunities translates into our positioning in short duration bonds, which offer an attractive risk-return trade-off in the context of an inverted yield curve
  • Nonetheless, we maintain a neutral exposure to the asset class as real interest rates remain negative in most jurisdictions.
Fixed income: neutral
  • We see moderate risk-return opportunities in fixed income given the recent spread tightening and late cycle dynamics. Sovereign rates are less attractive in the context of a low yield environment and that we see the higher-quality segment of corporate credits as a better alternative, given their relative safety and better returns
  • We remain cautious on the riskier parts of corporate debt as they don’t entirely compensate investors for the level of risk taken at a time when credit events may be on the rise. Emerging markets bonds remain our favourite bet to enhance returns at this stage in the cycle due to their yield pick-up.
Developed government bonds: neutral
  • Developed government bonds worldwide have been losing their appeal as rates edged down amid softening economic growth, lower inflation expectations and dovish monetary policies. Given this backdrop, we anticipate the asset class to predominantly be a diversifier rather than a major source of returns 
  • Although US dollar real rates remain at historical low levels, they are still too attractive to ignore relative to the other developed bond markets. UK and European bond markets failed to synchronise with US rates due to their own geopolitical challenges, and depressed yields make it difficult to find these markets attractive.
Investment grade bonds: neutral
  • A still benign macro outlook and easing interest rates should be broadly positive for investment grade bonds. Nevertheless, we remain neutral on the asset class amid mounting concerns over the rising pile of corporate debt
  • Although spreads have tightened significantly since the beginning of this year, we believe investment grade bonds will continue to earn some carry and thus outperform low yielding government bonds, specifically in Europe.
High yield bonds: low conviction
  • While default rates are at historical low levels and corporate fundamentals remain robust, we maintain low conviction to the asset class as margin pressure typically increases late in the economic cycle
  • Following the recent rally in riskier assets, high yield bonds look expensive. Spreads are tight by historical standards, which we do not view as attractive in the context of the credit and liquidity risk taken and the returns available from other asset classes.
Emerging markets bonds : neutral
  • The Fed’s dovish stance and stronger local currencies should continue to provide some relief to the largely dollar-denominated emerging markets (EM) debt
  • Although choppy energy prices and unresolved trade disputes provide a headwind to emerging markets bonds, credit quality hasn’t deteriorated and the economic momentum backdrop remains reasonably positive
  • Spreads have tightened since the beginning of the year as investor flows reverted back into EM bonds amid improving sentiment. However, spreads remain comparatively wide versus high yield bonds and offer a better risk-return profile. We favour US dollar emerging markets hard-currency bonds due to their relatively attractive valuations.
Equities: positive
  • Positioning in high-quality, growth companies through active management is our preference given our view that in late cycle, alpha (actively selecting superior businesses) out-performs beta (passively following the market). Although we see more compelling opportunities in developed market equities, the recent repricing in emerging markets equities resulting from trade tensions provides what we believe is a short-to-medium term entry point
  • However, not all emerging markets are created equal, with Asia appearing to provide stable (albeit lower) growth than Latin America. That said, our view on emerging markets may change in the longer run should emerging market equity appreciate excessively. It is for these reasons we have high conviction in developed market equities and remain neutral on emerging markets equities depending on the time horizon and risk budgeting of the portfolio as a whole.
Developed market equities: high conviction
  • Earnings growth is still expansionary, albeit slowing, with growth forecast to be low-to-mid single digits over the year. Healthy fundamentals continue to underpin the investment case for this asset class, while valuations are not excessively stretched compared to history
  • Increasingly accommodative central banks and fairly constructive macro data from both sides of the Atlantic should support recovery globally. This backdrop should lift the asset class further, even though downside risks from trade tensions remain in the background
  • We favour active management and selective stock picking of companies with strong balance sheets, although we are agnostic on the geographical allocation of our equity positions. We focus on businesses with high cash returns on capital, with conservative capital structures and ideally an ability to reinvest cash in future growth at equally high rates of return. The US tends to offer us more opportunities to invest in these kind of businesses meaning that North America remains the largest geographical weighting within the equity allocation.
Emerging markets equities: neutral
  • While markets have grown increasingly cautious following heightened protectionism fears, emerging markets equities should benefit from attractive valuations and steady economic activity out of the region, which will continue to underpin expansionary, albeit softening, growth
  • We expect fiscal and monetary easing in China to counteract a slowdown in the region and limit downside risk to earnings expectations. Trade tensions still pose a significant risk but will likely dissipate as economic pragmatism should eventually prevail.
Other assets: neutral Alternative asset classes will continue to provide diversification to our portfolio, but are not expected to be main drivers of returns. Gold is set to benefit from its status as a safe haven in the late cycle, while real estate and alternative trading strategies are underpinned by a weak investment case.
Commodities: neutral
  • The sole exposure within commodities continues to be our position in gold which we view as complementary to the other risk mitigating assets in the portfolio, especially in light of the low interest rate environment and global trade fears
  • We find little attraction in this asset class outside of precious metals and find our risk budget better deployed elsewhere.
Real estate: neutral Real estate should continue to provide mild diversification benefits. We anticipate loose monetary policies to favourably impact returns, although weaker economic growth could prove to be a headwind.
Alternative trading strategies: low conviction
  • We maintain a low conviction in alternatives due to their high expense and a lack of investment opportunities in this space. The limited use of leverage should  further cap returns for the asset class
  • Nonetheless, sudden spikes in volatility, which are likely to materialise more often in a late-cycle environment, may lift the asset class at least in the short term.

Market Perspectives August 2019

Find out our latest key investment themes. As expectations of more dovish central bank policy grow and early signs of a potential thaw in trade tensions, sentiment has turned for the better. However, with many geopolitical issues on the horizon and several financial markets close to record highs, is it time to de-risk portfolios?


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