Barclays sees upside in stocks as re-risking stays subdued
Investing.com -- Barclays believes the path of least resistance for equities is still higher, supported by muted re-risking, resilient earnings, and favorable liquidity conditions.
Despite a market rebound in recent weeks, the firm notes that “mutual funds inflows stalled in May,” while hedge funds and CTAs remain “under-exposed to equities.”
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According to Barclays, “retail buying showed only a modest pickup,” and although allocation to equities remains high, investor sentiment is cautious.
As a result, “systematic buying may help equities to keep grinding higher” as volatility stays contained.
The equity outlook is also being cushioned by improving fundamentals, according to the bank.
“Resilient earnings, a pick-up in buybacks activity and a steady rise in global M2 liquidity all favour equities,” Barclays said, even as concerns about U.S. debt sustainability temporarily flipped the equity-bond correlation negative.
Meanwhile, a rotation out of U.S. equities and into the rest of the world (RoW) appears to be gaining momentum.
“U.S. vs. RoW equity flows have started to turn and follow the dollar lower,” with global ex-U.S. equities “breaking out from their post-GFC range.”
While European investors haven’t sold U.S. assets aggressively, “U.S.-domiciled investors sold U.S. equities and bought into RoW equities last month.”
European equity demand “remains steady,” especially from domestic investors, and EM equities have also benefited from a weaker dollar. Japan saw equity inflows pick up, though fiscal concerns led to bond outflows.
Sector rotation trends are also said to suggest opportunity. “Cyclicals outperformed in May and saw inflows pick up,” Barclays said, while crowding remains low in EU exporters, autos, consumer cyclicals, energy, and AI plays.
Among the current market risks, Barclays lists potential “pain trades” as “higher equities, lower yields, higher USD, US>ROW, Cyclicals>Defensives, Growth>Value, and EU exporters>domestics.”
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