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Multi-asset portfolio allocation

07 August 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: neutral
  • 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 neutral conviction in the asset class from a risk management perspective.
Fixed income: neutral
  • We see moderate risk-return opportunities in fixed income given market dynamics. Although sovereign rates appear less attractive in the context of a low-yield backdrop, they offer 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. With spreads coming in from extremely wide levels in April, we prefer to allocate our risk budget in the equity space. In high yield, selection is key. We prefer high yield, and emerging market (EM) hard currency debt over EM local currency debt considering the increasing risk facing EM economies and currencies.
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 unprecedented liquidity injections from major central banks. However, as economic data continue to deteriorate, we see the asset class as a diversifier and maintain our holding to a small overweight this year
  • Although US dollar real rates remain at historically low levels, they are still marginally more attractive relative to the other developed market bond markets. Amid the COVID-19 outbreak and more 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
  • A large contraction in the economy and earnings will likely lead to a substantial increase in leverage ratios and a higher risk of downgrades; specifically, among BBB-rated bonds. While higher spread offer opportunities, selection will be key
  • With central banks announcing large supporting measures, like liquidity facilities or large bond-purchasing programmes, bond spreads have started to retrace again
  • Notwithstanding volatility in the short to medium term as a result of COVID-19 and increasing fears over a second wave, we remain neutral on the asset class as we expect more spread volatility.
High yield bonds: neutral
  • Amid the market turmoil, spreads widened to historically elevated levels before retracing back again. However, we remain wary of the impact of lower oil prices on energy-related names and the broader economic impact of the COVID-19 pandemic
  • The economic effects of the coronavirus outbreak have significantly increased the risk of default. That risk increases the longer the pandemic continues, subduing economic activity. However, spreads at current levels likely open up selected opportunities in the asset class
  • Back in April, we increased our position in the asset class twice, closing a long-held large underweight position. We wanted to take advantage of wide spreads by historical standards, suggesting potential attractive returns. While still elevated, spreads are less attractive and we prefer to take risks in equities.
Emerging market bonds: low conviction
  • We prefer emerging market hard currency debt over local currency debt considering the increasing risk facing the respective economies and currencies
  • Many EM economies run high debt deficits, low currency reserves and potentially lack capacity to deal with the COVID-19 crisis. The recovery from the pandemic differs within EM and is mostly linked to the infection rates with Latin America, South Africa, Israel, the Philippines and India under pressure
  • However, the US Federal Reserve’s dovish stance should continue to provide some relief to the largely dollar-denominated emerging market debt
  • Although corporate fundamentals are now less robust and default rates are gradually rising, the majority of EM central banks have helped issuers with more accommodative monetary policies. With rising COVID-19 infection numbers starting to affect EM economies and forex, we are more cautious on local currency debt
  • Despite downside risks from geopolitical issues, we maintain low conviction to the asset class as margin pressure may increase in the current volatile environment.
Equities: positive
  • Positioning in high-quality, growth companies through active management is our preference; alpha (actively selecting superior businesses) usually 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 (Latam). Sectorwise we like a mix of defensive and growth exposure with a particular focus on quality.
Developed market equities: high conviction
  • The impact of the pandemic, and related widespread business shutdowns, means that there is very little visibility on near-term revenue and earnings numbers
  • Earnings will decrease substantially in 2020 but the market will look at 2021 and beyond to price in a recovery
  • Looking further out, 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 and slowdown in the region, particularly after the COVID-19 outbreak
  • While the region may suffer significantly for the pandemic in the short term (especially Latam), a secular shift from investment to consumption should support growth over the medium term
  • Furthermore, the region should benefit from the benign rate environment
  • While markets have grown increasingly cautious, emerging market equities should benefit from attractive valuations. We remain neutral and increased our position in March after the virus-induced sell-off.
Other assets: low conviction Alternative asset classes will continue to diversify our portfolio, but are not expected to be the main drivers of returns. Gold should keep 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, in our view.
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, such as merger arbitrage
  • We recently further reduced our conviction, preferring to move into cash and to increase high yield to neutral, where better opportunities exist. 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.
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Market Perspectives August 2020

Financial markets remain fixated on pandemic risks, and hopes of a COVID-19 vaccine, as spikes in infections occur in regions of leading economies.

Market Perspectives
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