Investors should stay with an equity rich portfolio and focus more on idiosyncratic factors within asset classes than on the potential for major risk-on, risk-off market swings, according to Barclays’ latest flagship quarterly research publication, Global Outlook: Stay with equities for now. Despite the recent rally in equities, recommendations made in Barclays’ December 2012 Global Outlook favoring equities over bonds continue to hold true, with equities outperforming almost all other assets by a wide margin. “The predominant risks today are that the market has come too far too fast, and that investor sentiment has become overly optimistic,” said Larry Kantor, Head of Research. “However, we expect any correction to be contained given persistent fundamental support for equities, including extraordinary monetary stimulus, low risk of a cyclical downturn and attractive valuations relative to fixed income.” The resolution of US fiscal issues in the direction of near-term restraint is occurring against a background of better-than-expected economic momentum, thus moderating growth enough for the Fed to maintain aggressive asset buying. However, as signs of improving US growth prospects are confirmed, there is a risk that investors begin to price in an end to the Fed’s massive bond-buying program – although this is unlikely to be an issue for the next few months. In Europe, Barclays has revised down forecasts of growth in Q4 2012 and Q1 2013. However, against the background of continued recession, what is surprising is how little impact events such as the Italian elections and the Cyprus bailout have had on markets. This reflects the success of policy measures – especially the backstop provided by the ECB – in stabilizing country and bank funding and the cautious stance of market positioning. In Japan, with the government’s commitment to ease monetary policy, the Bank of Japan appears set to join the Fed in applying extraordinary monetary stimulus. The Global Outlook now expects Japan to be the one developed economy showing truly robust growth this year.
Other recommendations in Barclays’ Global Outlook include:
- Prefer developed market over emerging market equities
- Maintain equity exposure in both the US and Japan; UK stocks are appealing; Spanish equities look cheap
- In fixed income, there are probably more opportunities in emerging markets than in the developed markets, where yields are already at rock-bottom levels
- Look for returns in EM using asset selection based on idiosyncratic factors such as divergences in monetary and FX policy across countries
- In commodities and credit, correlations have fallen dramatically reducing opportunities for broad directional trades
- Expect further weakening in the yen and the British pound