Barclays Wealth September Strategy Update

Investment themes

• Financial markets are closer to fair value
• Asia is and will remain the most economically dynamic global region
• Short-term interest rates to stay low
• Inflation is not the problem: inflation expectations could be

Macroeconomic view

• The initial “green shoots” of recovery have started to grow and branch out recently – much as expected. The sheer passage of time has helped, but policy responses have fostered a return of confidence or what Keynes called “animal spirits”.

• The decline in Q2 US GDP turned out to be a little smaller than economists expected, and Q3 should see a return to growth. However, the downward revisions to Q1 suggest that the hole the economy is climbing out of is even deeper than seemed likely a quarter ago.

• The UK economy’s recent performance has been disappointing. By contrast, the French and German economies unexpectedly expanded in Q2. That said, the detailed statistics do not point towards an accelerating recovery.

• Emerging markets – especially those in Asia – are returning to growth, most notably in China where the government has been successful in boosting economic activity.

Investment calls

1. Hedge against rising inflation expectations. We don’t think that actual or realised inflation will be a problem. However, rising inflation expectations could pose a threat to long-dated nominal bonds.

2. Maintain investments in Asia but be selective. Rather than buying an index, we advocate active management in Asia or “thematic” portfolios such as infrastructure. Investors can also consider Western companies with high levels of Asian revenue.  

3. Don’t settle for 0% in cash portfolios.  High-quality short-dated bonds still offer a substantial pick up in yield versus cash or short-dated government bonds.

4. Add exposure to the Brazilian Real (BRL).  Brazil offers an attractive inflation-adjusted interest rate of 4.5%. The BRL continues to look cheap and should strengthen further against developed currencies.

Aaron S. Gurwitz (pictured), Head of Global Investment Strategy at Barclays Wealth, concludes, “We no longer want to leave the impression that we’re more worried about the potential pain of a double-dip than the opportunity cost of missing a continuing rally.

"Investors whose portfolios are still positioned defensively should move toward a normal risk posture.”