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 now expect only a modest rise in U.S. 10-year yields over a 12-month horizon, despite buoyant U.S. growth. Even after the end of Fed QE, U.S. debt is likely to continue to appeal to many investors. Bund and JGB yields will remain lower, weighed down both by policy and lower rates of inflation and economic growth. Within corporates, we see opportunities in high yield, with low expected default rates providing an effective backstop. We stay broadly positive on emerging-market hard currency debt, and see selective opportunities in local currency debt, despite some currency concerns.
P/E ratios are now looking rather high in the United States. Global growth concerns could also add to downward pressure on multiples here and in Europe. But improved corporate earnings (and, in Japan’s case, BOJ and pension fund purchases) are still likely to take developed market equities higher on a 12-month horizon. German stocks would also appear relatively well placed. Within the emerging markets, we continue to have a preference for Asia. Elsewhere, selectivity is necessary, with Russia and Brazil obvious areas of concern.
Oil prices have fallen further, to a level where they might start to affect investment decisions on future U.S. shale output. But without decisive action by the Organization of the Petroleum Exporting Countries (OPEC) to limit its own production, any sustained upwards move in oil prices looks unlikely. Gold prices have continued to move in a narrow range as any possible upward impetus from geopolitical uncertainty or possible central bank purchasing is offset by a strong U.S. dollar and a broadly "risk-on" environment.