Equities will still offer the best returns in the months ahead - despite last year’s gains - and should be overweight in balanced portfolios, says Barclays Wealth in its investment calls for February.

Investors should hold their nerve and stay invested in risk assets despite uncertainty over regulation, monetary tightening, and the extent to which trouble in certain sovereign bond markets will spill over, says Barclays Wealth.

The rigorous cost cutting which drove the recovery in corporate profits last year should be replaced by modest increases in top line growth and, with interest rates likely to remain low, this will boost equities.

The rally in equity markets last year has caused some people to worry about future performance, however the price gains follow an even steeper fall and are underscored by a rebounding of profits, and consequently Barclays does not think valuations are demanding. It advises choosing developed markets over emerging markets due to better valuations, and considering convertible bonds for a high yield, low volatility method of gaining exposure.

Asia stands to be the best region for active management, but due to high regional valuations stock-picking based on local expertise is necessary, said Aaron Gurwitz, head of global investment strategy at Barclays Wealth.

For fixed income investment, the bank prefers short-dated to long-dated bonds. The gap in long-dated yields and money market rates has rarely been exceeded, but nevertheless it expects the gap in yields to increase to a greater extent than the futures market is pricing in.

It also prefers corporate to government bonds due to the relative balance sheet and cash flow strength of many non-financial firms, the end of quantitative easing, and the likely rise in long-term interest rates, says Kevin Gardiner, head of investment strategy, EMEA.

Barclays thinks gold is overvalued and due for a correction at some point. It is sticking with its call for January to short the metal in such a way as to limit losses should the correction not come for a while, recommending buying long-dated put options on one of the gold-based ETFs or a structured note as a potential strategy.

The bank remains positive on UK commercial real estate, in contrast to its bearish views on UK residential property and US commercial property, with the exception of some hotspots where yields are no longer attractive.