In Barclays’ medium-term model portfolio, bonds have reclaimed their central role alongside stocks. Little is expected from commodities. The money market also offers insufficient returns.
Barclays publishes not only its usual annual outlook but also periodically provides a long-term (5-year) outlook. One of the key conclusions from its latest publication is that bonds have made a strong comeback as a central pillar in the model portfolio, alongside stocks. Let’s explore other important views and expectations.
Slow (if any) economic growth
Barclays predicts minimal global economic growth for the next five years. The bank speaks of a mild recession followed by a sluggish recovery, particularly in Europe, which is more affected by the aftermath of negative interest rate policies compared to the US.
Europe faces a dilemma: whether to increase government spending or return to cheaper money. Both options can potentially lead to higher inflation, which is already causing significant difficulties for citizens.
Moreover, the urgent need for substantial investments in green energy and additional taxes on greenhouse gas emissions due to global warming will not immediately result in higher productivity (and may even lead to lower productivity).
Emerging markets’ resilience
Emerging markets are likely to fare better in the coming five years. Although Barclays doesn’t anticipate significant short-term damage from climate catastrophes, these markets are expected to exhibit more resilience compared to developed economies.
Persistent high inflation
Barclays expects inflation to remain well above 2% on average over the next five years. Once again, Europe faces a dilemma concerning its central banks. Raising interest rates to target 2% inflation could result in a recession. The extent to which both central banks are willing and able to act is uncertain.
Low savings returns compared to inflation
Barclays believes that central banks cannot return to the low interest rate environment of the last two decades. This situation favours savers and investors in short-term bonds.
The bank projects that from 2025, interest rates will substantially decrease to new long-term averages: around 2.5% to 3.0% for the UK, just above 2.0% for the US, between 1.5% and 2% for the Eurozone, and below 1% for Switzerland. However, Barclays questions whether these rates will be high enough to offset inflation, implying that investors seeking real purchasing power gains will have to explore opportunities beyond the money market.
Central role for bonds
The outlook for bonds appears positive. Following a disastrous year in 2022, initial yields have risen enough to make investing in bonds lucrative again.
Over the next five years, government bonds are expected to yield between 2.5% and 6%, which is higher than the past two decades. Furthermore, the negative correlation with stocks seems to have been restored, making government bonds and Investment Grade Bonds not only profitable but also offering portfolio diversification in case of a stock market correction.
However, corporate bonds with lower credit ratings won’t have the same benefit. They will be as volatile as stocks, but their expected returns are higher than those of government bonds.
Barclays prefers to avoid investing in emerging market bonds due to the risks associated with currency fluctuations, despite their relatively higher interest rates.
Erosion of advantages in stocks
While stocks continue to offer the highest returns, their advantage over bonds diminishes when considering the associated risks.
Limited appeal of commodities and alternatives
Barclays assigns a minor role to commodities and alternatives in its Strategic Asset Allocation. The slow growth in the commodities industry, including energy, is expected to yield only around 2.5% returns.
As for alternatives like infrastructure and other “real assets,” Barclays projects a 4.1% return. Although this might sound appealing, it pales in comparison to the renewed attractiveness of bonds, which also serve as better hedges against stock market corrections.
