Wednesday November 4, 08:50 AM

FUND VIEW - Barclays bets on lagging markets as recovery firms

By Manuela Badawy

NEW YORK (Reuters) - Barclays Wealth is betting on small companies in developed countries, exposure to economic growth in Asia, and commodity exporter currencies to preserve and increase wealth for its clients.

Although emerging markets have led the global economic recovery, stocks from this asset class are now more expensive than from developed markets, said Aaron Gurwitz, head of global investment strategy at Barclays Wealth, which returned more than 100 percent between early March and mid October.

Instead, developed equity markets, and in particular small and medium capitalization companies, are now best positioned to reap the rewards of an economic recovery.

"Laggards are those U.S. small- and mid-cap companies that have not performed as well as they usually would do relative to the wider market, probably because large cap banks have been hogging the limelight," said Kevin Gardiner, head of investment strategy for Europe, Middle East and Africa.

"As that fades and the economic recovery comes more to the fore we expect small-cap companies to start performing once again," Gardiner said.

Asia, however, will remain the most dynamic region of the world, the source of opportunity as well as risk, Gurwitz said.

Asian economic growth should lead to greater demand for commodities, with base metals and energy companies leading the way, said Manpreet Gill, Asia strategist.

Commodity currencies are another way of executing the same view, Gill added, saying the bank favored the Australian dollar and the Norwegian krona as their governments are leading the way in tightening monetary policy.

Australia's central bank raised interest rates for a second month running on Tuesday by a quarter point to 3.5 percent, as it steadily withdrew stimulus from an improved economy. Norway's central bank last week ordered the first interest rate increase in Europe since the global crisis by a quarter point to 1.50 percent.

LESS DOLLAR MORE EMERGING CURRENCIES

Investors should keep at least 20 percent to 25 percent of their allocations in non-U.S. dollar-denominated assets to protect the purchasing power of their wealth, said Gurwitz.

"The dollar has been depreciating on a trade-weighted basis on an average rate of 0.75 percent per year since 1973 and will continue to do so," Gurwitz said. "Our currency will command less and less of a premium as the reserve reliable currency."

The best currencies to have exposure to are from emerging economies where there is good macro economic policy and high interest rates.

Brazilian real, Indian rupee, Indonesian rupiah, Korean won, Polish zloty and South African rand are Barclays' favourites.

(Editing by Leslie Adler)

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