Barclays Wealth says actual or realised inflation will not be a problem, but rising inflation expectations could pose a threat to long-dated nominal bonds.
The company’s Compass Investment Strategy EMEA report states that for any investment portfolio expectations is similar to that of rising inflation itself. Whether or not inflation eventually occurs, investors will move to sell assets such as long-term fixed rate bonds, which perform poorly in inflationary environments, and bid up the prices of popular inflation hedges, such as commodities and real estate.
The report also says investors should maintain investments in Asia but be selective. Rather than buying an index, Barclays advocates active management in Asia or ‘thematic’ portfolios such as infrastructure. Investors can also consider Western companies with high levels of Asian revenue.
In addition, Barclays believes investors should not settle for zero per cent in cash portfolios. High-quality short-dated bonds still offer a substantial pick up in yield versus cash or short-dated government bonds.
It says investors should add exposure to the Brazilian Real. Brazil offers an attractive inflation-adjusted interest rate of 4.5 per cent. The BRL continues to look cheap and should strengthen further against developed currencies.
According to the report, the decline in Q2 US GDP turned out to be a little smaller than economists expected, and Q3 should see a return to growth. However, the downward revisions to Q1 suggest that the hole the economy is climbing out of is even deeper than seemed likely a quarter ago.
The UK economy’s recent performance has been disappointing, the report says. By contrast, the French and German economies unexpectedly expanded in Q2. That said, the detailed statistics do not point towards an accelerating recovery.
Emerging markets – especially those in Asia – are returning to growth, most notably in China where the government has been successful in boosting economic activity.
Aaron S. Gurwitz, head of global investment strategy at Barclays Wealth, says: ‘We no longer want to leave the impression that we’re more worried about the potential pain of a double-dip than the opportunity cost of missing a continuing rally. Investors whose portfolios are still positioned defensively should move toward a normal risk posture.’