We talk to the UK-based private bank to ask about its asset allocation stance, its expectations for investment and financial markets.

The first month of 2022 has already passed but it’s still early enough for private banks and other wealth managers to think about the big asset allocation moves for the year. The US and certain other developed countries are likely to push up interest rates to curb inflation. Geopolitical worries such as developments around Ukraine add to uncertainties. Disruptions to supply chains, as well as government policies, have arguably driven energy prices sky high. 

In this interview with Julien Lafargue, chief market strategist, Barclays Private Bank, this new service asks what sort of investment stance makes most sense.

In broad terms, is the bank overweight, neutral or underweight of risky assets (equities, forms of property, some private equity, venture capital) at the moment and for the next few months? 
We remain overweight equities over fixed income. We are also positive about alternative sources of returns including private markets (both equity and debt) as well as real assets in the current context of heightened inflationary pressures.

What does the bank think is likely to happen with global inflation this year, given recent sharp increases, fuelled by rising energy prices, disruptions, and huge central bank money expansion? 
After peaking around the second quarter, we believe inflation will start fading in the second half of the year as base effects help, supply chain disruptions ease gradually and central banks’ more hawkish bias bear fruits. However, inflation should remain above pre-pandemic levels for the foreseeable future.

Given that inflation has risen sharply, what are you saying to clients about the way to handle it?
We believe it’s essential to improve diversification outside of just equities and bonds by adding exposure to select private markets and real assets. We also expect post-lockdown inflation to remain elevated in early 2022, but to ease later in the year as supply bottlenecks and other economic frictions subside. In this uncertain environment, proper diversification and active management will remain key to improving portfolio performance.

Given how capital and equity market valuations have been affected by a decade of central bank policy and other forces, can government bonds form a useful “ballast” role in portfolios, or are yields so low/negative that this no longer makes sense?
Fixed income instruments still have a role to play in portfolios. While they have contributed positively to returns in the past few years as rates remained on a down trend, we believe they will play a different role going forward. Rather than exhibiting a positive correlation to equities, they are much more likely to provide diversification benefits in periods of stress.

Do you have strong views, either pro or anti, about specific countries’ markets, currencies and asset classes?
Regionally, we started the year with a strong preference for Europe over the US. This is because we wanted to adopt a more cyclical positioning and benefit from the prospect of higher interest rates. We expect this trend to continue in the short term.

Are there any assets and areas of investment that are out of favour that you think investors should look at more closely? 
China equity markets have significantly underperformed last year and their valuations are at the lows. As the country starts stimulating its economy just when other parts of the world are tightening monetary policy, we believe China could stand out on investors’ radar later this year. In terms of sectors, healthcare and technology will continue to exhibit very attractive long-term growth prospects. However, their performance could be challenged in the short term should interest rates rise.

After years of big inflows, do you think there is still plenty of room for robust returns from private equity, private debt, infrastructure and real estate? 
Just as for equities and bonds, private and real asset returns are likely to be more muted going forward. However, they could still be attractive on a relative basis, especially if investors remain selective. For example, while a lot of money has piled into private equities, these flows have been concentrated at both ends of the spectrum (large managers and those investing in very early stage companies). On the other hand, mid-market managers which focus on deals between $100 million and $500 million haven’t collected as many assets. This allows them to find opportunities at more reasonable prices as there is less competition.

Should ESG be seen as a form of thematic investing, taking its place against other thematic investing approaches? 
We believe ESG shouldn’t be considered as a theme but rather as an integral part of any investment process. Sustainability is the next evolution of the investment industry, not simply the latest or novel product or structure to sell.  Building portfolios that can capture potential green investment opportunities, while simultaneously guarding against climate risks, will definitely matter for investors in 2022. In essence, sustainable investing is the “new normal.”

We have a lot of uncertainties and worries about issues such as Omicron, Ukraine, China and certain countries’ politics. How are you dealing with this in terms of sticking to an asset allocation framework while keeping flexible? 
First of all, we believe that any investment decision should be based on objectives as well as time horizons. If you’re investing for the next 10 or 20 years, issues like these become less relevant. This is why we rely on our strategic asset allocation and investment philosophy to do much of the heavy lifting when it comes to performance. We then try to complement this strategic approach with shorter-term opportunities that may present themselves as the market overreact one way or the other.

Barclays has over the years been a pioneer in behavioural finance. How do behavioural finance insights affect the way in which the bank advises clients on how to invest and avoid mistakes?
Our investment strategy team includes a range of specialists including people focusing exclusively on behavioural finance. They play a critical role in informing not only our views on markets but also how to best help investors navigate what can be challenging environments. At the same time, I believe that the pandemic has helped investors understand the importance of active management and the advantages of building a high quality and diversified portfolio that can stand the test of difficult times. Our message for investors is that being and staying invested and taking a long-term view continues to make sense, although one should be prepared for more elevated volatility, and potentially slightly lower-than-average returns in 2022.