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
U.S. Treasury yields have stayed low and German Bund yields even lower. For the moment, concerns about geopolitical risks and the Eurozone’s economic health are the driving force in the market. But yields will soon start to move up as the focus returns to Fed intentions and the end of quantitative easing. We see limited potential in the Eurozone periphery and high yield space. Within emerging market fixed income, we would now favor hard currency over local market debt, believing that it may in many countries offer better returns after adjustment for exchange rate risk.
Further gains have taken many equity markets to a level where valuations look high. But, with the global economy recovering, there is plenty of scope for earnings increases – and thus for equities to move higher. However expect some volatility – ECB President Mario Draghi’s policy initiatives may have bolstered Eurozone sentiment for now, but upsets are possible here and elsewhere in the world. Emerging markets look set to continue to perform well, but with significant variations between markets.
We stay downbeat on commodities. U.S. dollar strength will be a significant headwind for the sector generally. High levels of geopolitical risk seem unlikely to have much of an impact. Increasing U.S. production will keep the lid on oil prices, and any gold price gains will be limited by expectations of an impending Fed interest rate hike.