Barclays Wealth

Time to take a more "business as usual" approach says Barclays Wealth monthly strategy update

Our Investment Themes:

• Move past the crisis
• Position for this economic recovery
• Seek diverse exposure to Asian economic growth
• Short-term interest rates are likely to remain very low for a long time, but longer-term yields will likely start rising sooner

Our Macro view:

• The events during the fourth quarter of 2008 and first quarter of 2009 proved so traumatic that many investors wondered if the wheels had indeed "come off the bus" – both in terms of the efficacy of economic policy and also the ability of economists to understand the current situation and predict what might happen next.
• But, looking back at our initial 2009 projections, we can see that they provided a useful framework. For example, our judgement that policymakers in the developed world would keep interest rates close to zero and that returns from cash would be paltry proved to be spot on. We were also correct in suggesting that a rally in credit markets would be a necessary precondition of a sustainable rally in equity markets.
• Looking forward, the jury is still out regarding how quickly finance ministers will switch from "easing" to "tightening" mode, which could well have significant implications for the future direction of monetary policy. However, we believe interest rates should remain low in 2010 too, as long as governments start making tough fiscal and structural reforms soon, as we expect.
• In FX markets, the major currencies have not moved as much, in trade-weighted terms, as they did in 2008. Nevertheless, the dollar has weakened more forcefully than we expected as recovery has gathered steam, while the euro has stayed stronger than we thought it would. We are currently considering whether the dollar's multi-year decline has further to go.

Our investment calls include the following:

• Short long-term government bonds: Although long-dated bond yields have risen from their 2008 lows, they continue to trade well below their historical averages. We do not expect this situation to last as rising inflation expectations, heavy supply and expectations of tighter future monetary policy should all exert upward pressure on yields. We expect the rise in bond yields to be more pronounced in the US and UK relative to the euro area, given that the ECB has emerged as the central bank with the strongest inflation-fighting credentials. The simplest way to position for this scenario is to reduce the average duration of bond portfolios and overweight euro-area bonds versus US and UK bonds.
• Buy commodity currencies versus the yen: We continue to see upside for the Australian dollar and Norwegian krone as their economies show further improvement and interest rates climb higher. We are also adding the Canadian dollar to our list of recommended currencies, as Canada's recovery has outpaced that of the G3. We also recommend that the yen should be the lone "short" position (rather than being just one-third of a short G3 basket), reflecting our view that it will be the weakest of the major currencies on a trade-weighted basis over the next twelve months.
• Consider investment in distressed debt: Some $554 billion of bank loans and $389 billion of high-yield bonds will mature over the next five years. However, traditional sources of funding are likely to remain tight. This scenario should present numerous opportunities for distressed debt managers, particularly as current levels of volatility provide attractive conditions for distressed debt trading strategies. Moreover, as economies recover, investors should be rewarded for taking on some illiquidity risk.

Aaron S. Gurwitz, Head of Global Investment Strategy at Barclays Wealth, said: "The past year's events were deeply traumatic for most investors, but now is the time to move on, and take a more "business as usual" approach to investment decisions. We would also stress that each economic recovery is unique, and while prices for many typical early cyclical winners already reflect the expectation of continued recovery, plenty of investment opportunities still exist."

"One of those opportunities resides in the distressed debt markets," Michael Crook, Alternatives Strategist at Barclays Wealth said. "Although we believe the beta opportunity in credit markets is behind us, relative and absolute value distressed debt managers have a very opportunistic environment to work in."

"Looking forward from here, equity markets are within sighting distance of pre-Lehman levels - levels which we might loosely associate with "normal" levels of volatility and more mundane investor expectations," continued Kevin Gardiner, Head of EMEA Investment Strategy. "But those expectations may still be too downbeat in several respects. We see three key supports to stocks: A vigorous recovery in quoted sector profits; a friendly interest rate environment; and undemanding valuations, underpinned by rising profits. Indeed, as far as we are concerned, it is still not too late for investors who want to benefit from rising stock prices."

For further information contact:

UK
Arnaud Humblot, +44 (0) 020 7699 2756
Lucy Davidson, +44 (0) 20 7114 9813
Will Bowen, +44 (0) 20 7114 8434

US
Monique Wise, +1 212 526 3568
Jignasa Patel, +1 212 526 6435
Matt Kirdahy, +1 212 812 5665 x117

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