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
Returns here are likely to be modest and not without risk. The low level of U.S. sovereign-debt yields is incompatible with buoyant U.S. growth and we expect them to move upwards over the course of 2015. Bund yields are also likely to rise, if even more gently, with some limited scope for further spread tightening in peripheral Eurozone sovereign debt. Returns on developed-market, investment-grade corporate credit are also likely to be relatively low. However, despite the impact of low energy prices on some borrowers, U.S. high yield is likely to continue to offer opportunities in 2015. Within emerging-market fixed income, we would tend to favor hard-currency debt.
Markets continue to be periodically unsettled by a range of concerns including Eurozone growth, the implications of lower oil prices and deflation more broadly. But, looking beyond the immediate uncertainty, equities are likely to benefit from continued high levels of liquidity – due to central-bank policy remaining generally accommodative, even after Fed policy normalization – and gradually strengthening global growth. However, the focus will remain on corporate earnings growth. The hope is that continued growth in U.S. earnings will be confirmed by the ongoing 2014 fourth-quarter reporting season and that downward revisions to European earnings will soon bottom out. Within emerging markets, we continue to prefer Asia.
Oil prices have fallen by around 50% in just three months and any recovery is likely to be gradual. Significant U.S. shale-capacity reduction may well take many months to achieve. History suggests that the steepness and speed of the oil-price fall is likely to have implications for other commodities, for example industrial-metals prices, as well as other asset classes. Market uncertainty was one factor exerting slight upwards pressure on the gold price in early 2015. But, particularly as we expect U.S.-dollar strength to continue, any gold-price gains are likely to be minimal and temporary.