Tactical asset allocation

07 June 2019

Barclays Private Bank views on the positioning of assets in your portfolio.

Developed equities: overweight
  • 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 us more opportunities to invest in these kind of businesses, meaning that North America remains the largest geographical weighting within the equity allocation.
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.
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 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 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 and BBB-rated issuance
  • 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.
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 risk but will likely dissipate as economic pragmatism should eventually prevail.
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
  • We find little attraction in this asset class outside of precious metals and find our risk budget better deployed elsewhere.
Emerging markets bonds: neutral
  • The US Federal Reserve’s accommodative stance should continue to provide some relief to the largely dollar-denominated emerging markets (EM) debt, despite the recent weakness of local currencies
  • Although choppy energy prices and escalation in trade disputes provided 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, but remain comparatively wide versus high yield bonds. We favour US dollar-denominated emerging markets hard-currency bonds, due to their relatively attractive valuations.
High yield bonds: underweight
  • While default rates are at historical low levels and corporate fundamentals remain robust, we maintain an underweight exposure 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.
Alternative trading strategies: underweight
  • 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 June 2019

Investment experts from Barclays Private Bank analyse intensifying geopolitical tensions hitting economic growth expectations.


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