How should investors reallocate their portfolios for the end of the year? By Investing.com

Investing.com – Considering key developments in global markets as we approach the end of the year, investors should consider making adjustments to their portfolios.

According to UBS analysts, when it comes to portfolio reallocation during these uncertain times, it is critical to take a considered and strategic approach.

In the US, credit investors capitalized on the opportunity to lock in higher yields following the strong non-farm wages report, pushing US credit spreads to their tightest levels since May 2021.

However, while economic data remains resilient – ​​evidenced by stable consumer outlooks and better-than-expected growth – UBS cautions that this environment supports only a modest and mixed outlook for credit spreads.

In Europe, the growth recovery is progressing more slowly than expected, but market technicalities support tight credit spreads. A focus on carry strategies in Europe appears more attractive, especially as break-even points remain higher in the UK and Europe compared to the US

For example, 5-7 year investment grade European bonds currently offer attractive yields with a favorable balance between risk and return. Meanwhile, US credit spreads appear to be at their lowest level in three years, reducing their appeal relative to Europe.

For investors looking to optimize their portfolios, the UBS model suggests several reallocations. They recommend increasing exposure to US high yield (HY) bonds over the 3-5 year range while reducing exposure to US IG over the same time frame.

Similarly, in Europe, HY in the 3-5 year range presents an attractive opportunity for risk-adjusted returns.

Investors should also be cautious about emerging market credit, where UBS advises reducing exposure, as risks in emerging markets remain decoupled from developed market trends, especially following China’s post-COVID stimulus.

A key point emphasized by UBS is the value of carry, especially in the European and UK markets. GBP IG bonds are considered one of the most attractive options, offering solid diversification with low correlation to stock market performance.

The sweet spot for credit remains at the shorter end of the duration curve, but slightly longer tenors (5-7 years) are also becoming competitive as they now offer a better yield than previously.

Lastly, UBS analysts caution against adding synthetic credit exposure, as cash bonds still provide more attractive returns than credit default swaps.

As the year ends, a focus on high-yield credit, especially in Europe and the UK, and a shift to shorter duration credit instruments are key strategies to consider.