Barclays Wealth continues to recommend equities, particularly developed markets

The global economy continues to move firmly in the right direction, despite some patchier US data and the risks posed by high oil prices, and that will keep corporate profits growing, leaving the valuation of developed equities particularly inexpensive.

Barclays Wealth believes the global economic recovery can withstand the recent run up in oil prices as improvements in the labour market should outweigh the effects of higher oil prices on consumer sentiment. (Barclays Wealth does not expect oil to rise to $140-$150 a barrel.)

Commodity costs are not a high enough portion of companies’ costs to derail the increase in corporate profits.

Interest rates are slowly starting to normalize, but this process is expected to be gradual, reflecting the pace of recovery, and posing little challenge to corporate profitability.

While the fluctuating debate about US creditworthiness will be a source of ongoing volatility, it is unlikely to develop into a full-blow crisis

Europe remains solid, with Germany expected to grow at an above-trend 3.3% this year, although peripheral countries will continue to struggle.

“While some setbacks for developed equity markets in the weeks ahead would not be surprising, we recommend, particularly to those who are under-invested, that they use such volatility as an opportunity to add equities,” says Kevin Gardiner, Head of Global Investment Strategy. Barclays Wealth currently recommends for a moderate risk portfolio a 43% allocation to Developed Markets Equities and an 8% allocation to Emerging Markets Equities.

Barclays Wealth continues to believe bonds face the biggest cyclical and valuation headwinds. Kevin Gardiner comments: “It is the prospect of rising rates, and not the concern over sovereign creditworthiness, which makes us tactically wary of bonds”. Barclays Wealth recommends owning fewer Investment Grade Bonds than usual—allocated at just 1.0% for a moderate risk portfolio.

The divergence between two non-euro economies—Sweden and Switzerland— also gives rise to a stand-alone Barclays Wealth Investment Idea: namely, buying the krona and selling the franc.  Kevin adds: “The Swedish economy continues to grow and interest rates are rising, while the overvalued Swiss franc is likely to dampen that country’s economic growth and keep interest low.”

The primary concern facing the Chinese economy currently is overheating – as reflected in the tight employment situation, high urban real estate prices, and rising inflation. Barclays Wealth anticipates a soft landing.

The 12^th Five Year Plan (2011-2015) targets sustainable economic growth, with an emphasis on domestic demand and seven strategic industries, including energy saving & environmental protection, alternative fuel cars and bio-technology.

Chinese equities valuations are attractive. The MSCI China’s current price-to-earnings multiple of 11.6 times remains below its 5-year average of 13.5 times and below the MSCI Asia ex-Japan price-to-earnings multiple of 13.0 times.

In anticipation of lower inflation rates and a successful Five-Year Plan, Barclays Wealth recommends both short-term and long-term investors accumulate Chinese stocks, especially on any market weakness. However, effective stock selection is key.