Member Article

The beginning of the end of the financial crisis?

We may have entered are a new phase in the most remarkable financial episode of our working lifetimes. In June, Chairman Ben Bernanke suggested that the Federal Reserve may be getting ready to reduce its purchases of bonds, and so may have marked – at long last – the beginning of the end of the financial crisis. The long, slow process of monetary normalisation that will probably start with the ‘tapering’ of quantitative easing is unlikely to be a smooth one.

The scale and duration of the injection of liquidity by the Fed and the other major central banks in response to the crisis has been extraordinary, and most investment markets will face some withdrawal symptoms. The Fed-related sell-off was initially abrupt, but markets have stabilised relatively quickly. However, judging by the market’s response to the ‘tapering’ comment and by the focus of the media thereafter, one would be forgiven for thinking that the Fed was the world’s only central bank. Interestingly, Bernanke’s equivalents in the UK and the eurozone moved to reassure the market that they were prepared to continue supporting their respective economies, using various tools, for as long as necessary. Overall, we are optimistic that the US and global economies are increasingly capable of standing on their own two feet.

As a result, we expect the inexpensive asset classes that benefit from ongoing growth to continue to perform more strongly than the still-dear bond markets that have been most directly flattered by central bank buying. Our asset allocations have been shaped accordingly. This helped insulate client portfolios from some of the rebound in volatility in June, and in the quarters and years ahead we think that a carefully diversified but broadly pro-growth stance will more than compensate for the uncertainty that is part and parcel of getting invested and moving out of cash.

From the start of the year, we have been conscious of the possibility that the stock markets were running a little ahead of themselves. Our main concern, in particular, has been that other markets – most notably in the fixed income and credit world – have become very expensive, and are particularly vulnerable to the long-awaited reversal in interest rate expectations. With this latter point, in particular, in mind, we remain cautious of government bonds and investment grade credit; and hold a preference for developed over emerging markets.

Over recent weeks, we have retreated further from expensive bonds by shifting to an underweight in the composite asset class containing high yield and emerging market bonds. On a case-by-case level, we have been encouraging our portfolio managers to rebalance portfolios by buying protection where appropriate, taking out risk, and to take profits on individual positions – whether bonds or stocks – that had exceeded their fair value.

As always, we do emphasise that investing in shares is not for everyone. Their value can fall and you can get back less than you invest – if you are unsure, you should seek independent advice.

By Richard Clark and Simon Patterson, Private Bankers at Barclays Wealth and Investment Management, Newcastle

This was posted in Bdaily's Members' News section by Barclays Bank PLC .