Barclays Suggests 2016 Returns Will Be Mediocre and Recommends Investors Stay Neutral on Risk Assets
November 12 2015 - 8:30AM
Business Wire
Global Outlook report sees elevated valuations as priced for a
benign financial environment, which could turn more challenging as
the year progresses
Growth in advanced economies is on solid ground, albeit
disappointing by historical standards, and the likelihood of a
major blow to risk assets in the near term is limited, according to
Barclays’ latest flagship quarterly research publication Global
Outlook: Curb your enthusiasm. However, elevated asset prices imply
modest potential upside, especially as the current benign
environment is unlikely to persist as 2016 progresses.
“We do not expect the early stages of the Fed hiking cycle to
disrupt global interest rate or equity markets,” said Ajay
Rajadhyaksha, Head of Macro Research. “However, financial markets
are priced for a benign financial environment – steady growth, low
inflation and loose monetary policy. This is unlikely to persist as
2016 progresses. We suggest that investors start the year neutral
on risk assets, but recommend keeping some powder dry to take
advantage of possible risk-off episodes, such as the China-linked
sell-off we saw in August.”
The likelihood of a cyclical recovery in corporate earnings
appears higher in continental Europe than in the more cyclically
advanced US, UK and Japan. But outperformance in European equities
will likely be offset by local currency weakness. Moreover, it may
be too early to forecast a definitive end to Emerging Market equity
underperformance.
With fixed income returns challenged by the start of Fed rate
hikes, the belly of the risk curve offers the most attractive
opportunities. Investment grade credit appears priced for too
pessimistic an outcome and offers the most attractive risk-return
trade-off. While Emerging Market credit as an asset class will be
challenged by rising defaults and worsening technical conditions,
there may be opportunities in select US dollar Emerging Market
credit.
Other recommendations in the Global Outlook include:
- The US dollar is likely to have another
strong year, as policy divergence between the Fed and other central
banks increases. The Euro and many Emerging Market currencies are
likely to weaken against the US dollar, but not the Japanese
yen.
- Safe-haven duration markets are likely
to remain range-bound; we expect the 10-year Treasury to trade
between 2.1% and 2.6%, and 10-year bunds between 0.4% and
0.9%.
- Despite fears expressed by some
investors, a global recession remains unlikely, given the continued
tailwinds behind the global consumer – low inflation, easy
financial conditions and tighter labor markets.
Barclays’ Global Outlook report, published quarterly, provides
an assessment of all major economies and markets, and outlines
recommendations for investors.
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BarclaysJames White, +44 (0) 20 7773
1782james.xa.white@barclays.comorAndrew Smith, +1 212 412
7521andrew.x.smith@barclays.com
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