In 2009, investors should stay defensive in the short term, but start to add risk from spring onwards, in what will be “a year of two halves”, according to Barclays Wealth’s annual investment outlook.

With global growth predicted to be just 1 per cent, the aptly titled report, “A Long, Hard Slog”, anticipates a very difficult first half of 2009, followed by a recovery in the second half – but one which will vary widely in different geographical regions.

Michael Dicks, head of research and investment strategy at Barclays Wealth, said: “We think the US and euro-area economies are likely to contract by around 1 per cent in 2009. We are also more pessimistic than most on the prospects for the emerging economies.”

There is some good news for investors however, because as Mr Dicks points out, equity and credit markets usually get ahead of the economic cycle and so riskier asset classes may start to do well before GDP starts to rise again.

Barclays Wealth will be looking to build overweights in equities from the third quarter of 2009.  In the immediate future Barclays Wealth recommends a defensive stance on countries and sectors, but says that valuation, momentum and the macroeconomic backdrop all point to equity outperformance a few months from now.  “We would overweight US and emerging markets; underweight the UK,” the firm said. 

Within fixed income, Barclays Wealth says it will be going overweight in investment-grade credit in the second quarter.  While credit offers exceptional value, it is burdened by poor fundamentals and technicals. “Start 2009 short, but expect to get long by mid-year,” advises the firm.

In foreign exchange markets Barclays Wealth expects a continuation of recent trends driven by continued risk aversion in the first half of 2009. 

Sterling is predicted to stay weak at least till year-end, while the US dollar is likely to appreciate gradually. Conversely, the firm anticipates the euro to decline in line with underperformance in the euro-area economy towards towards the end of the year.

In the commodities markets, the bank foresees crude oil price weakness throughout most of next year, along with base metal prices remaining volatile and depressed.  In contrast, agricultural commodities are expected to rise in early 2009.

Finally, the firm is optimistic for the future of hedge funds despite the Credit Suisse/Tremont Hedge Fund index falling by more than 15 per cent between January and October. 

Counterparty risk, restrictions on short selling and a general lack of liquidity have provided a very tough environment, but Barclays Wealth is of the opinion that the failure or withdrawal of weaker hedge fund managers should allow those that remain to deliver attractive returns over the long term.

Barclays Wealth serves affluent, high net worth and intermediary clients worldwide, providing international and private banking, fiduciary services, investment management and brokerage. At 30 June 2008, its global client assets stood at £133 billion ($199 billion).