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
Year to date, Eurozone equities have delivered large gains, benefiting from market anticipation of the ECB ‘s QE . A weaker euro is likely to continue to provide a substantial tailwind. Japanese equities have also done well, helped by a weaker Japanese yen and improving fundamentals. U.S. equities have stagnated by comparison, and mixed U.S. economic data may have added to investors’ concerns. We are neutral on U.S. equities, but believe that they are likely to remain supported by inflows, with buy-backs one particular area of interest. We like equities overall, but as investors absorb the fact that the Fed rate hikes will really happen, volatility will increase and some temporary pullbacks are likely.
We remain in a twin-track world. The ECB ‘s QE has resulted in a situation in which around 30% of Eurozone government debt now has negative yields. But, across the water, both U.S and U.K. yields are much closer to “normal” levels. We expect Eurozone yields to remain low for some time and this will encourage substantial outflows into U.S. fixed income. One result may be an increase in the volatility of U.S. yields, particularly as we approach the most likely date for a Fed rate hike (September*). Credit spreads will also rise around this time, but we expect a subsequent tightening as investors start to factor in the likely pace of hiking. We stay constructive on credit on a global basis.
A rapid rebound in oil prices remains unlikely, although a gradual recovery is expected, with prices reaching around $65 per barrel ($65/b) by year end.* The overwhelming issue remains over-supply. Although U.S. rig count is now falling as shale producers become more selective this will take some time to translate into falling output. For gold, the issues are rather different. Outside of the United States, gold may be seen by some as a safe haven. But U.S.-dollar strength will create a substantial headwind, and we believe that this will keep gold range-bound between 1150 and 1250 over 2015.*