Entering 2018 in rude health
EVIDENCE that we are entering what tends to be known as the ‘high conviction’ phase of the economic recovery is building. However, we believe that the world economy will continue to grow and still see the cycle end as a relatively distant prospect. Here, I explain the current thinking behind our recommended tactical positioning. We still see investors being best served by leaning portfolios towards developed equities, and in the US and Europe ex-UK in particular.
::Cash and short-maturity bonds: Underweight
While cash continues to play a pivotal portfolio insulation role, the rising appeal from emerging markets equities has led the Asset Allocation Forum to deploy our cash holdings into the latter, bringing our position in cash and short-maturity bonds from neutral to underweight.
::Investment grade bonds: Underweight
The spread of investment grade credit over government bond yields has held more or less firm. Nominal yields in high quality corporate credit remain low in absolute terms and may make the job of those trying to make positive real returns difficult.
::Developed markets equities: Overweight
Leading indicators for the world economy continue to point to brighter times ahead. These firming prospects for global growth and inflation are what matter for trends in corporate earnings and therefore prospective equity market returns. The current yield available from developed world stocks (dividends plus net buybacks), allied to a conservative assessment of prospective dividend growth suggests mid-to-high single digit annualised returns are still well within reach from current levels.We remain overweight US stocks, thanks to a domestic economy that is furthest along the recovery path and a dominant share of a technology sector enjoying both cyclical and structural growth tailwinds. The gradual reduction in domestic economic slack should lead to better pricing and higher profit margins for continental European corporations – a key reason for our continued overweight in the region.
::High yield and emerging markets bonds: Overweight
Spreads remain tight relative to history even after the latest risk off bump. However, in a world where growth, and defaults, are expected to remain contained and inflation more or less benign, there are carry attractions to the asset class. We currently favour US high yield, paid for at the sub asset class level by a slight underweight to emerging markets hard currency debt, where the higher duration is not in favour in the current rising interest rate.
::Emerging markets equities: Overweight
The emerging markets business cycle is firming, as evidenced by business confidence surveys and trade data. The prospects for US consumption also look healthy, with both real income growth and consumer confidence still consistent with robust consumption spending. Within emerging markets equities, Asia remains our preferred region, with Korea, Taiwan and China (offshore) our highest conviction country bets on a strategic basis.
All investments can fall in value. You may get back less than you invest.
:: Jonathan Sloan (firstname.lastname@example.org) is a private banker at Barclays Wealth & Investment Management