Multi-asset portfolio allocation

06 March 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.

Cash and short duration bonds: high conviction
  • 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.
  • 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 recent spread tightening and late-cycle 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 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 may be on the rise. Emerging market bonds offer opportunities to enhance fixed income returns given relatively attractive spread levels, but active selection is key.
Developed government bonds: high conviction
  • Developed 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 increase our holding to a small overweight
  • Although US dollar real rates remain at historically low levels, they are still too attractive to ignore relative to the other developed bond markets. UK and European bond markets have failed to synchronise with US rates due to their own geopolitical challenges. Furthermore, depressed yields make it difficult to find both markets attractive, apart from in respect of managing overall portfolio risk. It was for this reason that we made a small addition to the asset class at the beginning of the year.
Investment grade bonds: neutral
  • Supportive financial conditions and moderate growth should be broadly positive for investment grade bonds and limit the risk of a sudden spike in default risk. Moreover, investment grade-rated companies still look healthy given their high interest coverage and generally low funding costs
  • Nevertheless, we remain neutral on the asset class as we expect spread volatility to increase in a late-cycle environment
  • Although spreads have tightened significantly since the beginning of this year, we believe further tightening is limited and the asset class will continue to earn carry and so 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
  • Even following the recent consolidation 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. For this reason, we have reduced our exposure at the beginning of the year.
Emerging market bonds: neutral
  • The Fed’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 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. That said, spreads remain comparatively wide versus high yield bonds and offer a better risk-return profile, as well as opportunities for carry trades. We favour US dollar emerging market hard-currency bonds due to their relatively attractive valuations and therefore, have recently 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 given our view that in late cycle, alpha (actively selecting superior businesses) outperforms beta (passively following the market). While we remain positive, we have modestly cut our positive view to reflect the growing risks to the 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
  • Earnings growth is still expansionary, albeit slowing, with growth forecast to be low-to-mid single digits over the year. Healthy fundamentals continue to underpin the investment case for this asset class, while valuations are not excessively stretched compared to history. However, in light of the coronavirus pandemic, we acknowledge the short-term disruption and impact on earnings
  • Increasingly accommodative central banks and fairly constructive macro data out of developed economies should continue to support the asset class, even though downside risks from geopolitical issues should limit the upside potential
  • 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.
Emerging market equities: neutral
  • Emerging markets have suffered from country specific risks, a strong US dollar and slowdown in in the region, particularly in China after the Covid-19 outbreak. Nevertheless, they should benefit from the benign rate environment. Therefore, we maintain a neutral position to the asset class
  • While markets have grown increasingly cautious, emerging market equities should benefit from attractive valuations. While we remain neutral, we increased our position in the asset class during the month 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 in the late cycle, 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 but we maintain a low conviction as the asset class looks expensive across different regions
  • We expect loose monetary policies to favourably impact returns, although the asset class faces structural challenges from the rise of online retailers while weaker economic growth could 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, although we do 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 late-cycle environment, may lift the asset class.

Market Perspectives March 2020

Financial market sell-offs, on concerns over the impact on growth of the spreading coronavirus, dented a strong start to the year and highlighted the attraction of diversified portfolios.


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