Multi-asset portfolio allocation

05 July 2019

Barclays Private Bank discusses asset allocation recommendations 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 makes short duration bonds look attractive from a risk-return perspective, especially 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 regions.
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 we see the higher-quality segment of corporate credits as a better alternative, given their relative safety and additional yield
  • We remain cautious on the riskier parts of corporate debt, as high yield spreads look unappealing for the level of risk taken, at a time when credit events may be on the rise. Emerging markets bonds remain our favourite call to enhance returns at this stage in the cycle, due to their yield pickup.
Developed government bonds: neutral
  • Developed government bonds worldwide have been losing their appeal as rates edged down amid lower economic growth, inflation and monetary policy expectations. The ongoing trade spat has further depressed yields as investors rotated out of risky assets into the safety of sovereign bonds. 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 historically low levels, they are still too attractive to ignore, relative to the other developed bond markets
  • Given the potential effects of the trade tensions to Europe’s core economies, Italian political uncertainty and weaker inflation expectations, European bond markets are likely to see a further flattening, suggesting deeper negative yields at the long end
  • The Bank of England (BOE) still tries to suggest that gradual rate hikes are likely once Brexit is resolved, with excess demand in the UK economy. We expect the market to price out any possibility of rate hikes very soon. The economic data does not seem to support the BOE’s ambition. Meanwhile, increased Brexit uncertainty will result in further pressure for the UK economy.
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 historically 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 US Federal Reserve’s (Fed) accommodative stance should continue to provide some relief to the largely dollar-denominated emerging markets (EM) debt market, despite the recent weakness of local currencies
  • Although choppy energy prices and the escalation in trade disputes provided a headwind to emerging markets bonds, credit quality hasn’t deteriorated and economic momentum remains reasonably positive
  • Spreads have tightened since the beginning of the year as investor flows reverted back into EM bonds amid improving sentiment, but they remain wide versus high yield bonds. We favour US dollar emerging markets hard-currency bonds due to their relatively attractive valuations.
Equities: positive
  • Positioning in growth companies and in particular developed markets is our preference, given our view that in the late cycle alpha (actively selecting equity) outperforms beta (passively following an index)
  • 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 structural trends in Asia appearing to provide more attractive opportunities than Latin America
  • But in the context of a multi-asset portfolio with a long-term investment timeframe, we have a higher conviction in developed market equities and remain neutral on emerging markets equities.
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 ahead. Healthy fundamentals continue to underpin the investment case for this asset class, while valuations are not excessively stretched compared to history
  • Although investor sentiment has been tested by renewed trade turmoil, less restrictive central banks and fairly constructive macro data from both sides of the Atlantic should support recovery globally and lift the asset class further
  • 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 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 in the region, underpinning 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 risk but will likely dissipate as economic pragmatism should eventually prevail.
Other assets: negative Alternative asset classes will continue to provide diversification to our portfolio, but are not expected to be the main drivers of returns. Gold is set to benefit from its status as 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: low conviction Real estate should provide mild diversification benefits, although the asset class faces structural challenges from the rise of online retailers and 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, the recent spike in volatility caused by renewed trade tensions may lift the asset class, at least in the short term.

Market Perspectives July 2019

Find out our latest key investment themes. As more dovish central banks and trade tensions drive sentiment, what are prospects for the rest of 2019?


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