Barclays Wealth continues to recommend developed equities despite volatile markets

Japan’s earthquake, higher oil prices, and fiscal worries in both the US and euro area have had an impact on many economic indicators. However, the global economy continues to grow solidly with an anticipated rally in H2.

Talk of a “double-dip” in the US is premature and growth is expected to accelerate in the second half of the year to a healthy 3.0-3.5%.

QE3 looks unlikely – as does a US default.

The Chinese economy is slowing down, but only moderately (as suggested by resilient readings in both industrial production and retail sales for May), and a “hard landing” appears unlikely.

Core growth continues in Europe – particularly in Germany and France – although Greece still poses a risk.

Japan faces a V-shaped recovery.

Commodity futures look expensive, but they offer some protection against geopolitical risk.

The gap between the growth of developed and emerging world will narrow, albeit temporarily, prompted by narrowing Inflationary pressures and the need for tighter policy in the emerging world.

“Given our concerns over economic uncertainty and sovereign creditworthiness, we are trimming risk ahead of a very unsettled Summer. However, we continue to recommend a level of risk that is modestly above the “neutral level”, hence our ongoing stance on developed market equities. In contrast to High Yield bonds, we think the best for stocks is yet to come” says Kevin Gardiner, Head of Global Investment Strategy. Barclays Wealth currently recommends for a moderate risk portfolio a 43% allocation to Developed Markets Equities and an 8% allocation to Emerging Markets Equities.

Barclays Wealth recommends moving funds from high yield and emerging market bonds into cash, where it is now tactically overweight for the first time in two years. Kevin Gardiner comments: “While we recommend switching from high yield bonds to cash, we view this as a transient move as the low level of interest rates makes this an expensive asset class. We do not expect to want to shelter here for long.”

Kevin adds: “We also continue to recommend a broadly cyclical sectoral disposition, favouring energy, consumer discretionary and technology sectors ahead of more defensive sectors.”

Further detail is set out in the latest edition of Barclays Wealth Compass report, which also explores the hedging of portfolios against foreign exchange risk and concludes that it is likely most useful in the case of bonds.