Multi-asset portfolio allocation

03 April 2020

4 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. Our clients in India should view our alternative article.

Cash and short duration bonds: high conviction
  • On the back of increased fears over a wider spread of the Covid-19 virus globally, we retain our preference for higher quality, liquid opportunities – which translates into our positioning in short duration bonds.
  • Although real interest rates remain negative in most jurisdictions, we maintain a high conviction in the asset class from a risk management perspective.
Fixed income: neutral
  • We see moderate risk-return opportunities in fixed income given the current market dynamics. Although sovereign rates are less attractive in the context of a low yield backdrop, they offer true protection in very weak economic environments. For this reason, we maintain a small overweight in developed market government bonds
  • In credit, we prefer the higher quality segment. We remain cautious on the riskier parts of the corporate debt market as they don’t entirely compensate investors for the level of risk taken at a time when credit events are on the rise. Emerging market bonds offer opportunities to enhance fixed income returns, given relatively attractive spread levels, but active selection is key.
Developed market government bonds: high conviction
  • Developed market government bonds worldwide have been losing their appeal as rates edge down amid softening economic growth, lower inflation expectations and dovish monetary policies. However, as economic data continues to deteriorate, we see the asset class as a diversifier and increased our holding to a small overweight this year
  • Although US dollar real rates remain at historically low levels, they are still too attractive to ignore relative to the other developed market bond markets. Amid the Covid-19 outbreak and more pro-active central bank behaviour, UK and European bonds have somewhat synchronised with US rates. However, depressed yields make it difficult to find both markets attractive, apart from in respect of managing portfolio risk.
Investment grade bonds: neutral
  • Amid the Covid-19 outbreak and recent market sell-off, spread premiums have widened substantially in the last few weeks and, in the medium term, may widen further. Despite supportive central banks, the risk of a sudden spike in downgrades has increased
  • However, investment grade-rated companies still look relatively healthy given their high interest coverage and generally low funding costs
  • Given spreads are now above their 10-year average, we see room for spread compression, but notwithstanding volatility in the short to medium term as a result of Covid-19
  • We remain neutral on the asset class as we expect spread volatility to increase.
High yield bonds: low conviction
  • In the current economic environment, corporate fundamentals are less robust and default rates are gradually rising, albeit from low levels. Therefore, we maintain low conviction to the asset class as margin pressure may increase in the current volatile environment
  • Amid the market turmoil, spreads have widened to historically elevated levels. However, we remain wary of the effect of a significantly lower oil price on energy-related names and the broader economic impact of Covid-19.
Emerging market bonds: neutral
  • The US Federal Reserve’s dovish stance should continue to provide some relief to the largely dollar-denominated emerging market (EM) debt
  • Although downside risks from geopolitical issues provide a headwind to emerging market bonds, credit quality hasn’t deteriorated and the majority of EM central banks have helped issuers with more accommodative monetary policies
  • We favour US dollar emerging market hard-currency bonds due to their relatively attractive valuations and so increased our holding in the asset class at the beginning of the year.
Equities: positive
  • Positioning in high-quality, growth companies through active management is our preference; alpha (actively selecting superior businesses) outperforms beta (passively following the market). While we remain positive on the longer term prospects for stocks, the near-term view has been clouded by the growing risks to the global economy
  • Regionally, we see more compelling opportunities in developed market equities where we maintain high conviction, while we remain neutral on emerging market equities from a risk budgeting perspective. However, not all emerging markets are created equally and so warrant selectivity, with Asia appearing to provide more stable (albeit lower) growth than Latin America.
Developed market equities: high conviction
  • The impact of the Covid-19 pandemic, and related widespread business shutdowns, means that there is very little visibility on near-term revenue and earnings numbers. Analyst estimates are highly dispersed and need to come down in the short term
  • Looking further out, however, market events have created an opportunity for those willing to take a longer term view and be selective
  • The rapid and sizeable response of central banks and governments to events means that the policy backdrop will be favourable when a recovery takes hold
  • Most importantly, we favour active management and selective stock picking of companies with strong balance sheets. 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 market equities: neutral
  • Emerging markets have suffered from country specific risks, a strong US dollar and slowdown in the region, particularly in China after the Covid-19 outbreak. Nevertheless, they should benefit from the benign rate environment. We maintain a neutral position to the asset class
  • While markets have grown increasingly cautious, emerging market equities should benefit from attractive valuations. We remain neutral and increased our position in the asset class during March after the virus-induced sell-off.
Other assets: neutral 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 a safe-haven asset, and for this reason we maintained our allocation to the asset class. Conversely, real estate and alternative trading strategies are underpinned by a weak investment case.
Commodities: high conviction
  • The sole exposure within commodities continues to be our position in gold which – in light of increasing headwinds for the global economy – we maintained our position in. We view this allocation as complementary to the other risk-mitigating assets in the portfolio
  • 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 continue to provide mild diversification benefits, helped by loose monetary policy. That said, we maintain a low conviction due to structural headwinds such as the shift to online retailing, as well as the higher leverage in the sector.
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. However, we favour strategies that have low correlations to equity markets. 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 volatile environment, may lift the asset class at least in the short term.

Market Perspectives April 2020

Financial market sell-offs, in the face of unprecedented policy measures to fight the effects of the Covid-19 outbreak, suggest any rebound may be a few months away.


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