Equities are likely to provide a greater reward than bonds in the immediate future, said an industry expert,  highlighting an ‘overweight’ in developed markets equities with a strong ‘underweight’ in high yield and emerging markets bonds.

“Bonds will always play an important part in a diversified portfolio even if, at the moment, they are expensive and appear complacent to the potential for returning inflation,” added Vic Malik, head of Global Investments and Solutions for Mena at Barclays Wealth and Investment Management.

He was commenting on the recently published “Compass” report, Barclays’ Wealth and Investment Management research focuses on providing investment advice and recommendations to investors across the globe, including the Mena region.

“A core principle of our investment philosophy is that clients should maintain exposure to different asset classes in a mix that is customised to each of their risk tolerance and personal needs,” Malik said.

The Q3 2015 Compass recommends a strong overweight for cash and short maturity bonds for clients with a moderate risk profile. The report also maintains an ‘overweight’ in developed markets equities, with a strong ‘underweight’ in high yield and emerging markets bonds. Overall, Barclays continues to stress the importance of diversification for investors, both on a geographic, as well as an asset class level.

Traditionally, the biggest risk for an investor choosing to lend to governments or companies over a longer time frame, rather than opting for a series of short term securities, is the threat of unanticipated inflation. Hence, the ‘underweight’ in bonds as an asset class, both in our strategic, as well as our tactical asset allocation recommendation.”

“Therefore, we suggest that equities are likely to provide the greater reward in the immediate future. Within the developed markets equity space, for example, we continue to place the majority of our tactical faith in continental European and US equities,” Malik said.

The report also addresses the scope for higher levels of profitability for European corporates, albeit from a depressed base. It suggests that corporate earnings growth in the European region may outpace that seen in other regions.

As for the US, which is seeing improving prospects for consumption and employment, although there is less scope for profitability to move higher, respectable levels of revenue growth should still see earnings grow broadly in line with their long-term average to compensate investors.

It is no surprise that another of the key themes in the report is interest rates, with Barclays believing that a more important point to consider is not so much when interest rates in the US will rise, but the pace of increases from that starting point. The market’s current expectation is that neither the world nor the US economy will generate sufficient growth or inflation to force the central bank to raise interest rates significantly.

Barclays is an international financial services provider engaged in personal banking, credit cards, corporate and investment banking and wealth management with an extensive presence in Europe, the Americas, Africa and Asia. – TradeArabia News Service