Tactical asset allocation

03 May 2019

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

Cash and short duration bonds: overweight Our preference for higher quality, liquid opportunities translates into our preference for short duration bonds, which offer an attractive risk-return trade off in the context of a flat yield curve.
Developed equities: overweight
  • Earnings’ growth is still expansionary, albeit slowing, with growth forecast to be at 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
  • Investors’ sentiment is gradually improving amid China’s renewed stimulus and progress on trade disputes and less restrictive monetary policy, which should support recovery in the rest of the world 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. In searching for companies to invest in, 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 has tended 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.
Developed government bonds: neutral
  • Sovereign bonds worldwide have been losing their appeal as interest rates have remained at historically expensive levels amid lower economic growth, inflation and monetary policy expectations in most parts of the developed world. 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
  • Improving economic sentiment and easing interest rates should be benign 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 debt 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
  • Emerging markets equities should benefit from attractive valuations and increased appetite for riskier assets driven by optimism around trade tensions and better economic data out of the region
  • 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 amid hopes for a breakthrough in trade negotiations between the US and China.
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 and a weakening US dollar should continue to provide some relief to the largely dollar-denominated emerging markets (EM) debt
  • Despite lingering political risks in the region, emerging markets debt should get an uplift by a relaxation in the US-China trade spat and the ongoing rebound in energy prices, given their reliance on commodity exports
  • Spreads tightened as investors’ flows reverted back into EM bonds amid the current risk-on sentiment, but remain comparatively wide versus high yield bonds. We favour US dollar emerging markets hard-currency bonds thanks 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 quite expensive and spreads are tight by historical standards. So we do not view the outlook for the asset class as attractive in the context of the credit and liquidity risk taken and the returns available from other asset classes. 
ATS: 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.

Market Perspectives May 2019

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