JEDDAH: "Global economic news has been steadily improving and investors have become more comfortable with risk as reflected in the low level of market volatility and a weaker US dollar. We therefore recommend that investors continue to target portfolio risk above strategic norms," said Aaron S. Gurwitz, chief investment officer at Barclays Wealth, a leading global wealth manager. And Kevin Gardiner, Head of Global Investment Strategy, added that "while we're experiencing an ongoing equity market rally, two recent developments have highlighted the need for a close eye on potential risks. The first is the political turmoil in the Middle East – a very visible reminder that geopolitical risk is always a part of the investment landscape – and the second is the bond market's skittish behavior in the face of high UK and European inflation." Both issues remain a potential threat on the horizon, but his advice is not to "not alter" the tactical asset allocation for this month. Barclays Wealth reiterate its view that investors should continue to sit tight, stay invested and diversify out of cash, even though the chance of higher interest rates has risen. Against this backdrop, Barclays Wealth recommends to hold more developed equities than usual, favor emerging equities, allocate to high yield and emerging market bonds, and developed government bonds. Barclays Wealth favor the US and Continental Europe ahead of the UK and Japan. "Valuations are undemanding in most regions, but this is where we think investors' views on corporate recovery will see the biggest upgrades," Barclays Wealth said in its Compass note for March. It further said that the case for long-term investing is still appealing, noting that Asia - particularly China, Taiwan and South Korea - "remains our favorite emerging region due to its faster trend growth, more diversified markets and better corporate and political governance." Moreover, allocating to high yield and emerging market bonds offers 7 percent yield and some exposure to the ongoing recovery in corporate creditworthiness, Barclays Wealth said. On developed government bonds, it said "our small overweight position in high quality government bonds should be viewed as portfolio insurance." Barclays Wealth also favored emerging equities, which have had a shakier start to 2011, down 3 percent so far. The inflation and interest rate cycle is more advanced here, valuations had moved close to trend, and several governments have been taking steps to deter capital inflows for fear of them destabilizing local economies. The case for long-term investing in emerging markets is still appealing to us. “We doubt that the monetary tightening seen to date – and likely yet to come – will be sufficient to produce more than a modest deceleration in growth in Asia in particular, which remains our favorite emerging region (particularly China, Taiwan and South Korea) because of its faster trend growth, more diversified markets and better corporate and political governance (India's current travails notwithstanding).” The other risk assets that Barclays Wealth favored are high-yield and emerging market bonds even as firmer inflation (and government measures to deter inflows) limits the amount of headroom in emerging bond markets. “This asset class offers the highest yield among the nine identified in our Investment Philosophy as belonging in long-term portfolios – roughly 7 percent as we write – and offers some exposure to the ongoing recovery in corporate creditworthiness too.” Despite the credit crunch, default rates for speculative grade credit are back close to pre-crisis levels, while spreads remain a little more elevated. “We doubt that investors will see much capital gain from the likely further narrowing of those spreads, but as the general level of interest rates rises the spread offers some protection and underpins the probability that investors will at least earn those yields.” The report noted that the overweight position in developed government bonds should be viewed as portfolio insurance. “We do not see this asset class offering attractive returns on a stand alone basis in our central scenario. Yields have risen further in the last month, but still remain well below historic norms.”
