Investors should shift their holdings into riskier assets like stocks, emerging markets and higher-quality junk bonds as central banks like the Federal Reserve keep borrowing costs down, investment bank Barclays Plc. said.
“Although major central banks did not substantially ease policy in the third quarter, the European Central Bank, the Bank of England and the Bank of Japan remain positioned to do ‘whatever it takes’ to support economic activity, reflation and by extension, financial markets,” Ajay Rajadhyaska, head of macro research at Barclays, said in a Sept. 29 report. “In the U.S., we are calling for a hike in December, but we recognize the risks to our call, given the Fed’s track record this year.”
The Fed in December raised interest rates for the first time in 10 years on signs that the U.S. economy was gaining momentum. The central bank started this year by signaling that as many as four rate hikes were coming, but found excuses to avoid raising borrowing costs, including low inflation, a tepid jobs market, China’s slowing economy, the U.K. vote to leave the European Union and the upcoming U.S. presidential election.
Investors on Friday forecast a 52 percent chance that the Fed will raise its key rate by 0.25 percentage point at its December 14 meeting, although inflation forecasts remain subdued.
“Why, then, signal a December hike? We believe that the Fed is worried about financial market stability and elevated asset valuations due to ultra-easy monetary policy,” according to the Barclays report. “The Fed’s credibility and willingness to do as it says is likely to be tested by markets next year.”
Barclays Investment Recommendations for Fourth Quarter
Stocks
- Moderately overweight global stocks
- Euro area, emerging markets over Japan and the U.K.
- Market weight on U.S. stocks
Bonds
- Underweight safe-haven bonds, with a market weight on corporate credit
- U.S. debt over euro area and Japan
- Moderate overweight on U.S. corporate credit over Europe
- Riskier investment-grade corporate credit, higher-quality junk bonds
- Overweight emerging-market U.S. debt, parts of emerging-market local currency debt