Investors should maintain a balanced portfolio, says Barclays
Investors should maintain a balanced portfolio that modestly overweights equities, according to Barclays’ latest flagship quarterly research publication Global Outlook: A balanced portfolio still makes sense.
With risks to Barclays’ modest growth forecast evenly balanced and bond yields now at levels roughly consistent with economic fundamentals, positions in fixed income should provide investors with an effective hedge against any stock market correction or growth disappointment.
“We advise investors to resist the temptation to overload their portfolios with stocks,” says Larry Kantor, head of research. “There has not been a stock market correction for nearly two years and investors have become more optimistic, which means that the bar for near-term stock outperformance is high.”
The steady downward march of medium-term growth prospects is another reason to avoid overly aggressive positions in equities. Potential growth has weakened in most parts of the world due to a slower increase in working age populations, higher dependency rates and weaker productivity growth. Economic forecasts are gradually coming down to reflect this reality, but policymakers continue to resist. The fact that the major policy response – easy money – is doing more for financial markets than growth is a good reason to favour a modestly overweight position in equities in the short run, but is not supportive of stock performance longer term.
The broad market sell-off in emerging markets is not a sign of a new EM crisis that will have a systemic market impact. Instead, it reflects a reallocation of capital out of developing countries and into developed markets, where policy remains very supportive and there is still room for economic growth acceleration. This is consistent with one of the unique features of the current business cycle, in which emerging countries such as China for the first time led the world in economic recovery, thus hitting capacity constraints, attendant monetary tightening and growth slowing before the lagging developed economies have.
Greater-than-expected weakness in Chinese economic data in recent months have reignited investor concerns about a hard landing, but policymakers are already once again putting aside their medium-term restructuring goals and employing policy tools to avoid any sharp slowdown from becoming sustained. Although this means that the next move in Chinese growth is probably up, it will be increasingly difficult over the medium term for policymakers to balance the need for structural reform with efforts to maintain a satisfactory pace of growth, suggesting that the risks of a sharp and sustained drop in growth in years to come are not insignificant.
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