Multi-asset portfolio allocation

04 September 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, a preference for higher quality and liquid opportunities – which translates into our positioning in short duration bonds – is maintained
  • Although real interest rates remain negative in most jurisdictions, a neutral conviction in the asset class seems to make sense from a risk management perspective.
Fixed income: neutral
  • Only modest opportunities are likely in fixed income given market dynamics. Although sovereign rates appear less attractive in the context of low yields, they offer protection in very weak economic environments. For this reason, a small overweight is maintained in developed market government bonds
  • In credit, the higher quality segment most appeals. But as spreads have recovered remarkably from their highs back in March, our risk budget is likely to be allocated 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 risk facing their 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, we see the asset class as a diversifier and maintain our holding to a small overweight
  • 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
  • As spreads are now back to tight levels, selection will be key
  • Notwithstanding volatility in the short to medium term as a result of COVID-19 and increasing fears over a second wave of infections, a neutral stance to the asset class is maintained as more spread volatility is likely.
High yield bonds: neutral
  • Amid the market turmoil, spreads widened to historically elevated levels before retracing. 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
  • Back in April, our position in the asset class was increased twice, closing a long-held large underweight. The rationale was to take advantage of wide spreads by historical standards, suggesting potential attractive returns. While high yield bonds have recovered well, with rising default rates, taking risks in equities seems preferable.
Emerging market bonds: low conviction
  • Emerging market hard currency debt is preferred to local currency debt considering the 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 infections starting to affect EM economies and forex, a more cautious stance is taken on local currency debt
  • Given downside risks from geopolitical issues, a low conviction is kept for the asset class as margin pressure may increase in the current volatile environment.
Equities: high conviction
  • Portfolios have been positioned in high quality, conservatively capitalised businesses for the longer term. While we remain positive on prospects for stocks over this period, 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 a broader opportunity set than elsewhere.
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 for the market
  • Earnings look set to fall substantially in 2020 but the market is likely to focus on 2021 and beyond to price in a recovery
  • 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 policy should be favourable when a recovery takes hold
  • Most importantly, active management and selective stock picking of companies with strong balance sheets is favoured. 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 such 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 Latin America), 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 appear increasingly cautious, emerging market equities should benefit from attractive valuations. Persisting with a neutral stance, our position in the asset class was increased 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 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
  • In light of increasing headwinds for the global economy and despite gold reaching an all-time high in August, value persists in gold compared to other commodities. This allocation is seen as complementary to the other risk-mitigating assets in the portfolio
  • The asset class has little appeal outside of precious metals and our risk budget can be better deployed elsewhere.
Real estate: low conviction Real estate should continue to provide mild diversification benefits, helped by loose monetary policy. That said, a low conviction to the asset class reflects structural headwinds, such as the shift to online retailing, and the higher leverage in the sector.
Alternative trading strategies: low conviction
  • The low conviction in alternatives reflects their high expense and a lack of investment opportunities in the space. However, strategies that have low correlations to equity markets, such as merger arbitrage, appear preferable
  • Indeed, conviction towards the asset class was further reduced recently, 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.

Market Perspectives September 2020

Financial markets are in fairly upbeat mood. That said, sentiment appears fragile while the focus of investors is on pandemic developments.


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