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
Market volatility in September was followed by gains in October and we remain generally positive on developed-market equities. Japanese and European equities are likely to be supported by further monetary-policy initiatives and U.S. equities should benefit from continued domestic economic growth. Although we expect rather better news out of China and some other Asian economies, recent emerging-markets outperformance looks unlikely to be sustained. The discount to developed markets appears justified by a lower return on equity (ROE) and higher leverage . Emerging-markets earnings estimates will also probably need to be revised down.
Whether the Fed decides to raise interest rates in December, or postpones the decision into 2016, the future trajectory of rate rises is likely to be low and slow. Yields on core government bonds are likely to pick up, but not by very much. Within corporates, we stay cautious on investment grade but continue to see selective opportunities in high-yield . Emerging-market hard-currency debt might seem to offer some attractive risk-return combinations, but the potentially large risk events (e.g. around Turkey and Brazil) suggest that it might be wise to stay on the sidelines for at least a few months.
Oil prices picked up in September and October, largely on hopes that declining U.S. shale output might start to reduce global oversupply. However, a sharp increase in prices looks unlikely – we forecast a price for West Texas Intermediate (WTI) of $55 per barrel in September 2016. The likelihood of the Organization of Petroleum Exporting Countries (OPEC ) scaling down production is slim and global demand seems unlikely to pick up markedly, particularly with economic growth forecast to slow further in China next year. Gold may temporarily gain from market volatility but will continue to face headwinds in the form of a strong U.S. dollar.