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,” said 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 favor 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.