The postponement of Federal Reserve tapering should focus investor attention on when US data will finally confirm a robust improvement in growth. While better growth has not shown up yet, there is reason for optimism going into 2014, according to Barclays’ latest flagship quarterly research publication,
Global Outlook: Growth Takes Center Stage
. The investment case for equities remains intact, but the surge in bond yields and continued rise in stock prices justifies a move toward a more balanced position between equities and bonds.
“US economic data are unlikely to confirm lift-off in the next couple of months, but conditions are aligned for a significant improvement as we move into 2014,” said Larry Kantor, Head of Research. “This will bring the Fed back into play, cause another leg up in bond yields and could well generate some retracement in stock prices, although most likely from higher levels than where we are now.”
The case for a sustained period of solid growth in the US is strong as we move into 2014. This means that US stocks may still have room for further appreciation, but they are starting to look more expensive relative to other global stock markets, calling for some rebalancing in favour of European and emerging market stocks, particularly in Asia.
In fixed income, the sharp sell-off that took place in reaction to the expectation of Fed tapering has created tactical opportunities in emerging market corporate credit, some emerging market sovereign bonds, and select US municipal bonds.
Recommendations in the
- Watch for increased market volatility, as markets are likely to pay close attention to US economic data in the coming months
- Shift some equity exposure from the US:
- to Europe, where earnings expectations do not appear to have adjusted to the modestly improved economic climate, and
- to parts of Asia such as China, which seems to be pricing an excessive probability of a hard landing that now seems much less likely
- Extreme reactions in some markets, including US municipal bonds and certain emerging market stock and bond markets, have created tactical opportunities
- Spreads on emerging market corporate bonds over developed markets are at historic highs, creating opportunities in all three major emerging market regions.
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