The report marks the beginning of a return to normality as opposed to a divergence from it. When the dust settles, the Fed’s decision to nudge interest rate expectations upwards may be seen as a signal that the economy is increasingly able to stand on its own two feet.
The report highlights that stocks are vulnerable short-term, but are inexpensive and can eventually benefit from the better growth outlook the Fed sees ahead. The report further emphasizes gold, long-dated bonds and emerging markets as the most vulnerable asset classes to a tapering of the US’ QE program. The Fed’s suggestion that quantitative easing (QE) “tapering” will likely begin in the months ahead –economists think September is the most likely month for bond purchases to be trimmed – has triggered sell-offs in most asset classes.
“Gold is particularly vulnerable as we transition to monetary normality. Many investors own it for its perceived ability to guard against the more inflationary – and dollar debasing– consequences of QE. That ability, and those risks, has been overstated, and gold – which carries no yield – is exposed as a result. Most investors’ holdings of gold should be in the low single digits as a percentage of their investment portfolio,” Kevin Gardiner, Head of Investment Strategy EMEA, for the Wealth and Investment Management division at Barclays, said.
In the short term, stocks are, of course, vulnerable. Barclays has long preferred developed markets (been tactically overweight), but been no lower than neutral on emerging equities. Stocks remain the least expensive of the big asset classes. Emerging stocks, having underperformed since late 2010, look cheaper, but are more vulnerable to financing flows.
“We already had a long-standing underweight in Investment Grade Credit and, while we are tactically neutral on government bonds, they have looked so expensive to us for such a long time that our strategic (long-term) weightings are small to start with,” he added.
Overall, he said, Barclays continues to advise a strategically underweight position in government bonds and a tactical underweight in investment grade credit (and cash), and remain neutral on emerging equities and on diversifying assets.