Mindful that many clients are clinging to cash, Barclays Wealth has urged investors to expect growth and invest in large companies in developed market stocks.
“As the events of 2008 recede and the mist slowly clears, it looks increasingly as if the crisis had its origins largely in financial markets rather than in the wider global economy,” the company wrote.
Corporate profits are projected to continue to grow, and developed market equities have become the cheapest asset class. Its ongoing recommendations for municipal bonds and Korean, Chinese and Taiwan stock remain in force. In the last month, however, Barclays has pulled back from its recommendation to overweight U.S. small cap stocks, because they’re gone up in price.
Cash: Barclays has kept an underweight position in cash and short-maturity bonds as a cornerstone of its asset allocation, noting that it was the worst-performing asset last year and may be in 2011.
Government Bonds: The sharp sell-off in core government bonds that began in November may have calmed down; yields peaked in December and have fallen back. Barclays recommends high-quality long-dated government bonds as a hedge against deflation. “We know that these assets are expensive—yields are well below relevant long term averages—but we suspect they may remain so for a while yet,” Barclays wrote. The recent sell-off in munis is a buying opportunity.
Other Bonds: Yields on high-grade corporate bonds are low and Barclays sees little opportunity, favoring instead high yield and emerging market bonds. “Moody’s notes that default rates for speculative grade credit in 2011 will likely be within spitting distance of their long-term averages—just two years after the “credit crunch” to end all crunches,” Barclays writes.
Gold: “To the extent that gold’s relative weakness of late is a signal that investors may be starting to share our skepticism about the prospect of monetary collapse and/or of imminent and sizeable inflation—two concerns that have contributed a lot to gold’s recent performance—we are encouraged by this New Year development.”
Barclays remains wary of commodities and U.S. real estate.