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Barclays Advises an Incremental Shift to a Defensive Portfolio

Global Outlook report recommends that investors reduce their exposure to global fixed income and increase their allocation to cash 

Investors should shift incrementally toward a more defensive portfolio since fixed income and equity returns are unlikely to be as uniformly positive in the second half of the year, according to Barclays’ latest flagship quarterly research publicationGlobal Outlook: A more defensive portfolio. The rise in US inflation is a major risk that financial markets have not yet priced in. As a result, investors should decrease their allocation to global fixed income, add cash in US dollars and overweight US inflation-linked bonds.

“We are less sanguine about the market outlook over the next six months,” said Jim McCormick, Head of Asset Allocation Research. “US inflation is picking up just as global fixed income yields have fallen sharply. At the same time, many credit spreads have returned to their 2007 lows while some equity markets, most notably the US, look a little bit stretched.”

The good news for investors is that after a weak start to the year, the trend in global growth in the second half should be better than at any time in the past 2-3 years. Barclays’ global GDP forecast envisions 4% growth in H2, compared with just 2.6% in H1. Any upside surprises on growth are more likely to come from outside the US.

We maintain our modestly bullish call on equities and recommend shifting exposure away from the US towards the European periphery, Asia and Emerging Markets.

Other recommendations in the Global Outlook include:

  • We have moved to tactically and strategically overweight oil.
  • We hold our credit allocation broadly unchanged, with overweight in emerging markets, neutral in high yield and underweight in investment grade.
  • We maintain our overweight in emerging markets equity, local currency debt and USD-denominated debt.
  • We exit our long-standing overweight in European peripheral bonds and re-enter an underweight euro FX allocation.
  • In Japan, overweighting equities against bonds is most attractive in the post-bubble period, according to the real yield gap.

Barclays’ Global Outlook research report, published quarterly, provides an assessment of all major economies and outlines the likely implications for global financial markets, including commodities, credit, economics, emerging markets, equities, fixed income and foreign exchange.