Real assets in demand, but hard to define as a separate class, says BarCap asset selector
Frank Engels, co-head of European Economics and head of Asset Allocation Research for Barclays Capital, says that clients are looking for real assets in the current environment, but that it is difficult to treat them as a separate asset class.
Speaking at the publication of the latest Barclays Capital Global Outlook: A Treacherous Path, Engels says the overall approach to asset allocation being recommended to clients was to remain “risk neutral” until greater clarity in terms of an outcome from the European debt crisis.
Looking across all asset classes, Barclays Capital is recommending an overweight in US, Japan and selected emerging markets risk.
Government bonds offer little or no value at current levels, and investors are instead better off looking at AAA credit in non-financial areas, where cashflows and cash levels are being maintained off the back of continued corporate performances.
Corporate debt is priced for recession, he suggested “so clearly, if there’s no recession there’s value there.”
Barclays Capital overall takes the view that there will not be a global recession, despite slowing growth. This means that “it is not the time to be outright short,” Engels said.
What is clear from client demand, however, is that people are looking for real assets, rather than synthetic alternaties. For example, investors prefer physical gold to gold options. Likewise, Engels says anecdotally a recent visit to Switzerland showed that people there are keen on buying land and physical real estate in the process of being constructed – to the point that it is difficult to get a builder or other tradesman to attend a repair on an existing property.
The Swiss desire for property has also taken on added impetus following the recent Swiss National Bank decision to peg the local currency.
However, ‘real assets’ as a distinct class does not exist, Engels says, and so needs to be seen in context of the traditional division of asset classes – such as equities, fixed income, property, commodities and so on.
The Global Outlook research suggests that investors are more cautiously positioned than earlier in 2011. Against that backdrop the research suggests the following “Top Trades”.
– Defensive long in 10yr Gilts and Bunds
– Long 1m in €/$
– Short €
– 5s10s flatteners on iTraxx Main
– Own inflation breakevens in the US in the 1-2yr sector
– Spread trades on copper
– Dividend futures, but only if the dust settles on the euro sovereign debt crisis
The current allocation themes proposed by the research are:
|Equities||In the US, we favour Industrials, Technology, Discretionary and Materials. These sectors outperformed in late 2010, during the macro stabilization portion of the rally and look positioned to perform well in the final quarter of 2011…. In Europe, we favour the Telecoms, Industrials and Chemicals sectors. For the risk-averse investor we recommend a portfolio of Swiss stocks. Within Europe, we prefer the FTSE 100 and the OMX 30 indices. We also like dividend futures, particularly the 2013 and 2014 maturities. We see opportunities for Japanese companies to restore global competitiveness via improved capital efficiency (ROE)|
|Bonds||We recommend shorting real rates and shorting breakevens. Either real rates are too low or breakevens are too wide. We see value in very front-end euro rates and expect 2s to trade in a range with a bullish bias near term. Tail risk hedges (long duration, swap spreads, etc) are rich but it is too early to fade these moves.|
|Commodities||Robust emerging market demand, tight balances and vulnerability to event risk mean that we do not recommend shorting commodities at this juncture. Physical gold demand has picked up since the pegging of the CHF. It should benefit as a hedge of financial insecurity and of easier monetary policy and associated inflation concerns. Reduce directional risk to commodities via spread trading strategies. We favour being long copper spreads and short WTI oil spreads for early 2012.|
|Inflation||5y+ breakeven positions will likely remain very directional. Sub 2y bonds will benefit more from inflation staying high, TII Jul12 and Jul13 are particularly cheap but sensitive to energy, UK IL13 and OBL€i13 have much less oil sensitivity.|
|Credit||Maintain longs in UK and Swiss banks and core European insurers. In non-financials, focus on less yclical B and higher; underweight CCC and cyclical sectors. In the US, overweight BBs and rising star candidates. In leveraged loans, higher spreads and Libor floors can provide income, and early takeout candidates can provide pull-to-par capital appreciation. In EM corporate credit, seek convexity; we prefer 10y BBs and Bs in LatAm/EEMEA, shorter-dated BBs in Asia.|
|Emerging Markets||Maintain an overweight in high-quality credits and prefer low-duration bonds in high-beta names. In FX, we recommend select longs in low vol currencies vs. the EUR and USD, favouring RV trades elsewhere. In local rates, we find value in the front end of curves where monetary easing is underpriced (MXN, CLP, BRL, KRW and PLN). Nominal and real bonds are attractive.|
|Foreign Exchange||Buy a 3m EUR/USD put spread with strikes at 1.33 and 1.27..Buy an equally-weighted basket of USD and JPY, and sell one of CHF and GBP. Buy AUD upside through a 6m, 25 delta AUD/USD risk reversal.|