Barclays Wealth is advising clients to stay invested and to adopt a “barbell” approach to asset allocation, to gain from corporate profits growth at a time of downbeat economic statistics, according to its July/August Compass.

The picture remains mixed, with the economic recovery in the US slowing on the one hand and corporate profits growing “faster than expected” on the other, says the bank.

GDP in the US grew 1.6 per cent for the second quarter of 2010, compared to 3.6 per cent in the first quarter. Meanwhile, second-quarter results season showed two-thirds of European groups beating analyst forecasts, while leading US companies are expected to report profits for this year, according to a recent report in the Financial Times.

Furthermore, investors continue to be polarised by their expectations on inflation and deflation.

In this environment, a “barbell" approach is recommended by Barclays Wealth for a balanced portfolio. This involves overweighting selected risk assets (such as equities and high-yield credit) and long-dated government bonds, and underweighting cash and investment-grade credit.

“For this tactic to work, both stocks and bonds must face relatively limited downside. If this weren’t the case, what we gained at one end might be given back at the other. Arguably, equity valuations seemed to provide something of a floor for stocks in June as they approached 2009’s lows. And the reduced likelihood of a hike in official interest rates on both sides of the Atlantic offers a degree of support to bond prices: a major sell-off seems unlikely with the curve so steep,” said Kevin Gardiner, head of global investment strategy.

The private bank recommends US 30-year to ten-year treasury spread compression as an investment idea.

“US ten-year yields have plummeted, leaving 30-year bonds looking cheap by comparison. Over time, we expect the gulf between 30-year yields and ten-year yields to narrow. This idea also acts as a low-risk hedge against deflation nerves extending further into the future," Gardiner said.

In other investment ideas, Barclays Wealth says US real estate is one asset class that didn’t experience the bounce back in 2009 that many others did. A strong turnaround in the US economy, combined with a lack of investment and construction in real estate, could see this matter change, said Brian Nick, investment strategist.