Barclays: What? Me Worry? Get Into Risk Assets They Say

“Few investors are seriously worried about another financial crisis,” a Barclays Global Outlook report states, blaring in the title that investors should “Stay the course on risk assets,” following previous research. While Barclays is downright positive, “many are now skeptical of the risk rally,” they concede in a March 23 Macro research report.

Barclays – This stock market can do nothing but go higher

The past nine months the stock market, faced with headwinds that would normally scare investors into submission, has “done their finest imitation of the little engine that could,” report author Ajay Rajadhyaksha, head of Barclays Macro Research division, noted alongside Michael Gavin.  “Political upheavals, the prospect of global trade wars, earlier-than-expected Fed hikes – asset prices have shrugged it all off and continued to rally.”

The “key tension” in investing markets can be found in valuations, but even here they are “not yet at levels that justify a near-term retreat from risk.” Safety has a cost and it is currently “expensive,” so embrace risk, particularly as neither the global economy or supportive financial conditions is unlikely to change over the few quarters, they predict.

 

Risk Assets The market is not too hot, not too cold

There are, of course, political risks that could rise up and bite investors in the tail. But overall deflation fears, which at one point gripped central bankers like the black plague, have faded in Japan and Europe. A broad-based global expansion is a sign along with reduced risk of deflation that implies the divergence in monetary policy seen since 2014 may largely have run its course as a driver of asset markets.

The market environment is not too hot, not too cold.

While some say they are seeing the white of inflation’s eye, inflation pressures in the US are low enough so that central banks can normalize interest rates “very slowly and remain supportive of financial markets,” the report predicted.

With inflation in check and growth not too hot nor cold, Barclays thinks the rally in the US dollar – a long in the tooth five-year trend — is close to ending. “The dollar should trade sideways for the next few quarters, another supportive element of the risk environment,” they wrote. “Bond markets should be similarly supportive; we expect a slow drift higher in global bond yields, with the US yield curve likely to bear-flatten and some convergence between longer rates in the US and Europe.”

Given this as a market outlook, Barclays likes its modest overweight towards equities relative to bonds. But in its equity allocation, they shift regions, moving from the high-growth US to the politically tenable European market.

Outside of the developed investing world, Barclays macro view is constructive on emerging market assets. Such support isn’t just reserved for stocks, but also dollar debt and certain regional currency sectors. “In corporate credit, we turn neutral on US and European high yield because of valuations and policy-related risks, but still recommend US and European (investment grade debt).”