Barclays: Don’t Worry About Vol, Buy Value And Oil

Despite the recent equity shakeout, the fundamental regimes underlying asset performance over the last two-quarters remain largely in place and declines present opportunities to buy energy (or more specifically oil), value and cyclical stocks that according to Keith Parker, global equity strategist, at Barclays.

WerbeFabrik / Pixabay

In a note published at the beginning of this week, Parker and his team consider the current state of markets and conclude that while there have been some changes in the macro backdrop since the beginning of the year, pockets of value are appearing across the market.

Barclays – Buy Value & oil

Energy is one sector where the analysts at Barclays believe sentiment has disconnected from the fundamentals. They point out that US crude and product inventories have fallen by 22m/bbl since Feb 10 amid steady end demand, and crude prices reset lower to the bottom of the two-year up-trend. Furthermore, excessive “long WTI futures positioning continues to be worked off, but energy is the biggest underweight now by US equity MFs, and relative energy stock short interest is not even halfway back to 2014 levels.” Also, energy shorts have been reduced, but relative sector positioning is still nowhere near 2014 levels.

 

Repositioning in energy has been part of a broader trend whereby investors favor cyclical sectors amid short term positive economic data:

“Unlike the 2011 and 2014 peaks in the cycle, equity investors have cut their cyclical tilt in half. Financials are still a consensus long, but also reduced by half, while positioning in other cyclical sectors is closer to neutral, suggestive of some scope to raise cyclical exposure.”

Possibly a reason to buy cyclical equities.

And lastly, small cap and value have both retraced some recent gains presenting an attractive opportunity for investors to take advantage of an unloved sector where the fundamentals remain robust:

“Strong outperformance by small stocks in 2016 has reversed decisively this year but relative MF positioning has turned more supportive.”

“Growth has outperformed value by about 5% this year, reversing the post-election relative gains. Positioning has reversed to favor value stocks on a relative basis based on relative MF betas.”