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.1
We stay generally positive on developed-market equities, where returns could reach low double-digit levels on a 12-month horizon. However, we are now in a mature market phase and periods of high volatility are likely as valuations return to historical levels. This means that tactical changes in allocations may be necessary. We are much more cautious on emerging markets , with Asian markets affected by their trading links with China. Latin American equities are likely to fare worse, due in part to problems surrounding Brazil.
When the Fed starts to raise rates, most likely in December, core yields will rise – if not by very much. European and Japanese bond markets will remain well-supported by accommodative policy from ECB and Bank of Japan (BOJ) . We are cautious on U.S. investment grade but continue to see opportunities in high yield . Emerging-market bonds may offer high levels of carry but this will be accompanied by increased risk, at least in the short term, making a highly selective approach essential. Emerging markets’ increased levels of U.S.-dollar-denominated debt are a concern.
Oil prices are forecast to increase from current low levels, but only slowly – we forecast a price of $55 per barrel WTI on a 12-month horizon. Demand for oil has so far proved resilient to slower emerging-markets growth, but the market remains in oversupply, although there are already signs that U.S. shale output could moderate. Gold is likely to trade in a tight range determined by U.S.-dollar strength; its “safe haven” appeal would be boosted by a prolonged period of market turmoil. We see only limited opportunities in commodities, so keep portfolio allocations at low levels.