Within the core part of our balanced portfolio, we cover traditional liquid assets such as equities, fixed income and commodities. The chart shows how we would currently design a balanced portfolio, including alternative asset classes.2
Over the medium and long term, we remain with our constructive view on equities. European markets have suffered a setback recently, triggered by the uncertainties surrounding Greece. The beginning of a Fed tightening cycle may also lead to some volatility. Nevertheless, at some point in the future setbacks may become potential buying opportunities. Emerging-market (EM) equities could well prove vulnerable to Fed rate rises and associated exchange-rate changes as EM corporations have significantly raised their leverage since 2007 and much of their debt is USD-denominated.
Anticipation of Fed rate hikes remains the dominant theme. We still expect these to start in September, but the upward path is likely to be a gentle one and it is possible that core government bond yields will overshoot before falling back again. In Europe, we believe that the ECB will continue its QE policy, but market uncertainty over its future policy direction could result in bouts of volatility , as could concerns about liquidity . We see continued potential in high-yield and emerging-market hard-currency debt, but see only limited room for further spread tightening in investment grade .
Oil prices have risen slightly in recent months but remain more than 40 percent below year-earlier levels. Although U.S. shale production looks likely to fall back, supply from other sources remains ample and we still await evidence of a sustained increase in global demand. For this reason, we believe that any further rise in prices in coming months should be limited. In the absence of any sharp downturn in global growth, we think that gold prices will be range-bound, facing headwinds from a strengthening U.S. dollar.