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Barclays Wealth advises to remain overweight equities

Thursday 4th March 2010
By Mike Jones

Barclays Wealth is suggesting a shift back towards traditional money market instruments.

Its "Compass" investment calls for March include:

* Stay overweight equities, but in some cases consider hedging;
* What the UK Election means for investors;
* Gradually prepare portfolios for interest rates rises;
* Buy a currency-hedged basket of Japanese exporter stocks;
* Commodities are a good hedge against geopolitical risk.

Recommendations

Investors should generally remain overweight equities. Lower-composure investors however might consider adding some protection to portfolios.

Barclays Wealth said a renewed bout of market nerves would likely prove temporary, and did not recommend that investors restructured their core portfolios. For lower-composure investors, Barclays Wealth shows how a strategy of hedging, using put options, can help reduce volatility in a cost-effective way.

What does the UK General Election mean for portfolios?

The UK General Election must be held by June 3, and the UK's fiscal position is sufficiently precarious to suggest that the new administration - whatever its political complexion - needs to take decisive action to avoid a ratings downgrade.

The worst outcome for investors might be an inconclusive election result. The last such outcome, in 1974, coincided with a vicious bear market in stocks and Gilts.

However, Barclays Wealth said it was not advising that investors diversify away from all UK assets at this point. The Pound is looking inexpensive already, particularly against the euro, and the UK stock market is effectively the most internationally-diversified large market. As with our current view of market risk in general, we would suggest that nervous investors consider hedging their portfolios rather than restructuring them.

Barclays Wealth said its central view on both the Pound and FTSE Index - but not 10-year Gilts - was that they were likely to be materially higher at the end of 2010.

Investors should prepare portfolios for interest rates rises

Barclays Wealth said its expectations for money market rates at end-2010 were now above those priced-in to the market. Central banks are still unlikely to raise official rates until the end of the year, but three-month money rates could rise sooner, and by more than the market expects. Within the portion of investors' portfolios devoted to liquid, cash-like investments, it would start to move back towards traditional money-market instruments, or possibly floating-rate notes, and away from (for example) short-dated government bonds.

Japanese equities have struggled, but exporters look attractive - partly because China is a key destination for Japanese exports

Japanese exporters are likely to benefit from the global economic recovery as well as the expected depreciated of the Japanese Yen. Although Barclays Wealth said it remained unexcited on Japanese equities overall, it believed Japanese export stocks could continue to outperform.

Barclays Wealth suggests that investors implement this view via a basket of currency - hedged export stocks.

Commodities are a good hedge against geopolitical risk

In the October edition of Compass Barclays Wealth recommended buying a diversified portfolio of commodities. Its reasons for doing so still apply today, even in light of the sharp sell-off in January. Barclays Wealth said it expected commodity demand from Emerging Markets to continue growing in 2010 and noted that, by historical standards, commodity prices had not recovered at anywhere near their usual pace relative to equities.

Aaron S. Gurwitz, Head of Global Investment Strategy at Barclays Wealth, said: "The S&P 500 generated an average annualised total return of about 16.5% between March 2003 and 10 October 2007. During this time there were five episodes in which the S&P declined by 5% or more. These events were relatively insignificant corrections - all of which were followed by new highs; however, the next decline in the index totalled 56.3%.  Given the sell-off in the market in mid-January, we understand some investors are concerned. One solution is the systematic policy of purchasing put options to limit the potential downside."

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