While evidence indicates that the global economic downturn will not slide into a prolonged recession or depression, a small chance of this occurring still remains, leading Barclays Wealth to advise that investors should increase portfolio risk only modestly.

In terms of asset allocation, Barclays Wealth is significantly overweight fixed income, particularly so on corporate debt. Investment grade corporate credit has significant appeal, with downside risks that are probably overstated, the firm believes, and it is also cautiously positive on speculative grade debt.

Barclays Wealth is of the view that government bonds are pricing in implausibly low levels of inflation, and therefore prefers inflation-protected paper. New US inflation-linked paper also offers protection against deflation, the firm notes.

According to Barclays Wealth, non-German euro area government bonds are attractively priced as it is convinced that fears about sovereign debt are overstated and governments can bear the costs of financial sector bailouts.

In equities the firm is maintaining an overall underweight, but is overweight on Pacific ex-Japan and emerging markets stocks. In terms of geographical preference, Barclays Wealth is more positive on US and UK equities than on Japan and the euro area.

Historical precedent indicates that cyclical stocks – such as materials, industrials, IT and consumer discretionary – should now outperform, and their appeal is bolstered by comparison to defensive stocks, many of which are overpriced.

“We suggest beginning to add more risk to portfolios, and look to Asia to lead the global economic revival.  Credit markets will outperform as risk appetite increases.

“But we remain somewhat cautious. Market volatility will ease back only gradually. We are not urging investors to increase equity allocations to levels above their strategic norms,” said Aaron Gurwitz, head of Global Investment Strategy at Barclays Wealth.