Barclays

Barclays Wealth believes the global economy is entering 2011 with better prospects

• Increase exposure to risk in Q1 2011: Overweight developed equities by trimming government bonds
• Municipal bonds are not the next "shoe to drop"
• Risk assets expected to generate respectable returns, especially equities
• Market moving surprises and potholes to avoid

Investment overview
We believe the global economy is entering 2011 with better prospects than feared, which will underpin the prospective profitability and creditworthiness of the publicly-traded corporate sector. The U.S. equity market looks cheaper at the start of 2011 than it did a year ago, and the low level of credit yields relative to dividends is fostering a gradual revival in U.S. M&A activity. This relatively positive combination of dynamics and valuations should encourage investors to increase portfolio risk, particularly in equities.

Aaron Gurwitz, Chief Investment Officer at Barclays Wealth, said: "While we are comfortable raising our exposure to equities quite substantially-doing so by trimming slightly an overweight position in government bonds-we still recommend maintaining a long-term, high quality bond portfolio."

"In fact, we are simultaneously bullish in both equity stocks and long-term bonds," continued Mr. Gurwitz. "The reason we like stocks is the potential for continued margin expansion. Gradually increasing sales volumes in a slowly growing economy can be consistent with robust earnings growth, even in the context of stable or slowly declining prices, if unit labor costs are rapidly decreasing. As for bonds, we believe that high unemployment will keep inflation low or declining and the Fed on the sidelines. Therefore, we recommend that investors hold a bond portfolio with a relatively long-average maturity."

Elizabeth Fell, Fixed Income Strategist, Barclays Wealth, said: "Contrary to much current thinking, we do not believe that the municipal bond market is the next 'shoe to drop.' A perfect storm of technical issues -- such as a spike in supply, credit concerns and yearend backup in U.S. treasury rates -- triggered increased market volatility, creating a more attractive point of entry for investors. Fiscal problems, deteriorating credit quality and other fundamental changes mean that investors need to tread cautiously, considering thoughtfully credit quality, revenue streams and diversification, but there continue to be interesting opportunities."

Kevin Gardiner, Head of Global Investment Strategy, commented: "In implementing our overweight developed equities view, we continue to favor U.S. small cap stocks and continental European stocks. Within the emerging markets, we remain positive due to strong economic growth, low debt levels and greater resilience in the face of market turmoil. We currently recommend investments in North Asian markets - Taiwan, Korea and China - due to their diversification, undemanding valuations and exposure to Chinese growth."

Potential surprises in 2011
The below, should any of these materialize in 2011, could have a market-moving impact:

• A strong recovery - growth in the developed economies could exceed expectations, led by the U.S.
• Interest rates rise faster - an unexpectedly-strong recovery might mean faster increases in official interest rates, triggering a short-term spike in equity volatility and a marked and more sustained sell-off in bonds
• U.S. housing market rebounds - while the U.S. housing market remains beset with problems, private housing starts have been stabilizing, signaling some potential market activity and price increase in 2011
• Dollar rises alongside risk appetite - if the U.S. economy were to surprise positively, expectations of rising interest rates and growing confidence in the value of U.S. assets generally might foster a solid rally in the dollar, even as global risk appetite revives
• Banks pay bigger dividends - the restoration and rebuilding of bank dividends could start to make the banks attractive sources of investment income again
• Russian stocks outperform - while Russia has lagged the other emerging markets there is arguably room for some catch up
• Japanese stocks surge - corporate taxes are poised to fall sharply; the yen may weaken as global risk appetite stabilizes; and the Japanese market looks inexpensive by local standards

The views of our Research and Strategy team can also be found in the Barclays Wealth Compass: Outlook 2011, Fundamental Improvement Despite Challenges.

For further information contact:

Jignasa Patel, Barclays Wealth, Media Relations
+1 212 526 3945

Monique Wise, Barclays Wealth, Media Relations
+1 212 526 3568