Barclays Wealth

Barclays Wealth suggests a shift back towards traditional money market instruments

Barclays Wealth '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

We think that the renewed bout of market nerves will likely prove temporary, and do not recommend that investors restructure their core portfolios.  For lower-composure investors, we show how a strategy of hedging, using put options, can help reduce volatility in a cost-effective way (see page 9 in Compass for more details).

What does the UK General Election mean for portfolios?

The UK General Election must be held by June 3rd, 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, we are 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.

Our central view on both the Pound and FTSE Index - but not 10-year Gilts - is that they are likely to be materially higher at the end of 2010 (see page 6 for more details).

Investors should prepare portfolios for interest rates rises

Our expectations for money market rates at end-2010 are 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, we 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 we remain unexcited on Japanese equities overall, we believe that Japanese export stocks can continue to outperform.

We suggest 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 we recommended buying a diversified portfolio of commodities. Our reasons for doing so still apply today, even in light of the sharp sell-off in January. We expect commodity demand from Emerging Markets to continue growing in 2010, and we note that, by historical standards commodity prices have 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."

Kevin Gardiner, Head of Investment Strategy, EMEA, Barclays Wealth said:

"For most of the last six months we have felt that the pace of increase in US and European interest rates priced-in to the money markets has been too rapid. This is no longer the case: money markets now look overly-optimistic to us. Within investors' holdings of liquid reserves, we suggest a shift back towards traditional money market instruments in preparation for the eventual rebound in rates."

For further information contact:

UK

Lucy Davidson
+44 (0) 20 7114 8947

Will Bowen
+44 (0) 20 7114 8434

US

Monique Wise
+1 212 526 3568

Tiffany Alcorn
+1 212 526 7992

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