Barclays Wealth is urging investors to keep faith in equities and stay overweight this asset class, arguing that stocks remain good value even after the sharp market rally of 2009 and the continued advance of this year.

The Morgan Stanley Capital International World Index of developed countries’ equity indices has delivered total returns, in dollars, of 4.9 per cent since the start of this year; on a one-year annualised historical basis, returns have been almost 47 per cent.

But Barclays Wealth says conditions are still favourable for further stock gains.

“We recommend equities from developed markets, particularly the UK.  Corporate profits are expected to grow just as quickly as those in emerging markets this year, while emerging market economies are expected to see monetary policy tighten prior to and more than in developed economies,” the UK firm said in a regular briefing note on its asset allocation views.

The wealth managers said there are signs that investors’ appetite for risk “seems to be returning”, as hinted by outflows from safe haven money market funds in the US; there remains about $3 trillion of assets in such funds, well above the levels prior to the start of the credit crisis, suggesting there is more cash to be put to work.

As equity markets normalize after the hectic period of the past two years, Barclays Wealth says investors should consider using long/short equity strategies to squeeze more value from their portfolios, to take advantage of swings in markets.

“Currently, intra-market equity valuation dispersion is at its highest level since 2004.  Investors should consider shifting a portion of their equity portfolio to high-quality equity long/short managers,” it says.

Barclays Wealth also suggests investors buy emerging Asia sovereign debt in the two to four-year maturity bands, as a way to harness improving credit conditions and robust economic growth in countries such as China, Indonesia, Malaysia, Singapore, South Korea and Thailand.