THE recovery is patchy, but selling risk assets now could result in missing out on a rally.

On a medium and long-term view, we still favour stocks and high-yield credit ahead of Government and investment grade bonds.

Having softened a little in March after a strong run through the winter months, the global economic data that matters most has been reasonably balanced in April.

Meanwhile, growth forecasts have stopped falling and in some cases have even edged higher as in the latest IMF global outlook.

We are not, of course, rash enough to suggest that financial stability is about to break out. Weak Spanish and Italian bond markets, expensive core Government bonds and the (modest) rebound in the cost of portfolio protection all remind us that investors remain nervous.

It is a safe bet that the euro crisis and the US growth debate will stay unresolved for many months yet.

Even the seemingly more focused concern about whether China will experience a hard or soft landing is unlikely to reach a definitive conclusion soon. No economy can grow at 8-9% forever, so some meaningful slowdown is inevitable at some stage.

Nonetheless, we continue to believe that disaster will be avoided in 2012 with room to spare and that this probability is not appropriately priced into stock and bond prices (positively and negatively respectively).

We advise that investment portfolios constructed on a medium and longer-term view should stay positioned accordingly.

A springtime setback in stocks is starting to look like a seasonal fixture. As yet, though, it is modest in scale. Developed equities have been trading in a 5% range since early February, a narrow one by recent years’ standards.

There is still plenty of profit on the table after the 17% rally from the autumn lows. Further weakness would not be surprising given the nervousness noted above and the ongoing geopolitical risk visible in and around the Gulf and on the Korean peninsular.

But we remain reluctant to advise selling stocks because we think the big picture remains intact and the risk of missing a resumed rally is quite high. Instead, we would use the setback to add, on a three-month view and beyond, to positions in what we think is still the cheapest asset class.

Valuations could yet be undermined by a sudden collapse in earnings. But if anything, consensus estimates for 2012 are edging higher on the back of what looks like a 13th consecutive forecast-beating US results season. Analysts’ upgrades, relative to the number of forecast changes in total, have rebounded to above-average levels.

We favour both US and Continental European stocks ahead of those in Japan and the UK – euro-area stocks are more volatile but have more room to recover than the US – and a mixture of cyclical, technology and energy sectors.

For investors whose circumstances allow them to move towards a diversified portfolio and away from cash, developed equities and high-yield credit are perhaps the positions to be built out first.

For portfolios that are well-diversified to begin with, we advise financing larger-than-usual weightings in these two asset classes at the expense of a smaller-than-usual weighting in core Government bonds.

:: Andrew Miller is regional office manager of Barclays Wealth in Newcastle