Barclays has announced the findings of its latest â€œCompassâ€ report, which includes the Bankâ€™s tactical recommendations to portfolio asset allocations. Published by Barclaysâ€™ Wealth and Investment Management division, the research focuses on providing investment advice and recommendations to investors around the world, including the MENA region.
The Q1 2016 Compass report, which examines major asset classes globally, retained an overweight allocation on global equities compared to fixed income. Within the equities asset class, the report favoured developed markets, with a focus on Europe in particular, where corporate profits have the highest potential to rebound. However, the report also highlighted the fact that border closures in Europe could weigh on corporatesâ€™ profits.
While the report reduced its allocation to fixed income instruments in general, it favoured developed government bonds over investment grade, high yield and emerging markets bonds, citing risks to the sub sector, particularly in the US market where energy-related defaults are expected to rise, due to depressed oil prices.
As for emerging markets equities, while the Q1 2016 Compass report remained tactically underweight on the asset class in the short term, it maintained a constructive long-term view for emerging markets due to their demographics. However, the Tactical Allocation Committee, which consists of senior investment strategists and portfolio managers at Barclays, still sees selective opportunities in emerging markets, most notably in the MSCI China index.
As for investing in commodities, the report also maintained an underweight allocation for this asset class, citing the impending approach of US interest rate hikes, which continues to cast its shadows on commodities prices. The Q1 2016 Compass report highlighted that key commodities, such as oil and copper, are close to bottoming out, while gold remains vulnerable to the impending interest rates hike.
While the new year tends to be a popular time to make changes, we believe that current economic climate will remain unchanged during Q1 2016, which supports our view that portfolios should continue to focus more on equities and away from the overpriced bond market, says Vic Malik, Head of Global Investments and Solutions for the Middle East and North Africa (MENA) at Barclays Wealth and Investment Management.
Investors will continue to have concerns next year over a number of issues, including effects of the slowdown of the Chinese economy, corporate debt in emerging markets given a stronger US dollar and the trajectory of the US interest rate if inflation nears the FED target.
â€œIn general, we see corporate profits as the most obvious opportunity to recover further in Continental Europe, a keystone of our overweight recommendation on the regionâ€™s equity markets. However, we think that the trends in US corporate sales will need to be observed closely to identify specific investment opportunities, especially given that corporate earnings during upcoming quarters can be impacted as a result of suppressed commodities prices and the increase in US dollar value.â€
In addition, the report stressed the importance of strategic allocation based on risk profile and active management of investment portfolios, in order to maximise returns.