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
Equities made a very poor start to 2016 and it is likely that a sustained recovery will require investor confidence that oil and other commodity prices have bottomed out and that Chinese-yuan weakening can be managed in an orderly way. Developed-market equities seem likely to gain more from a recovery than emerging-market equities: the latter will face a number of headwinds, including further downward revisions to corporate earnings. Developed-marketvaluations have fallen to more reasonable levels but good fundamentals can only become an upward driver of prices when general market concerns decrease.
Fixed-income markets have been affected by recent market stresses, particularly those related to low oil prices. Worries about energy-related defaults caused U.S. high-yield spreads to widen further in early 2016, possibly to the extent that they overstate real risks and therefore offer some longer-term opportunities outside of the oil sector. Continued caution is however suggested on emerging-market bonds. Market volatility, and the resulting demand for safe-haven investments, has pushed down yields on core government bonds and we expect yields to rise only slightly over the course of 2016.
Substantial oil stocks will likely keep oil prices low in the first half of 2016, as will increasing production by the Organization of the Petroleum Exporting Countries (OPEC), principally from Iran. But we believe that OPEC’s ability to increase production has its limits and that U.S. oil production will continue to fall during 2016 as financing capital expenditure remains difficult. Combined with a lowering of oil-stock levels, this will likely provide support for the oil price which should gently move upwards to $50 per barrel (WTI) by the fourth quarter. A stronger U.S. dollar over the longer term will of course create a further headwind for the prices of oil, gold and other commodities.