A more favorable backdrop for risk assets – Barclays

On the back of slightly better global growth in 2015 and most importantly accommodative monetary policies, risk assets should prevail next year, says Barclays in its freshly published outlook. Attached is the summary per asset class, and some key introductory remarks to this 168 page document distributed to investors and clients. Enjoy!

Barclays has a somewhat optimistic view of the world, since it expects it to grow 3.5% next year while it has bearly reach that level the last 3 years… But it also warns investors might be disappointed by future GDP figures from the US after the 4.6% rebound in Q3.

Conditions are nevertheless set for the US to be the « engine of the world », with possibly the help of large Asian countries (China, Japan, India). This view is open to controversy though since some investors consider the US growth is less dependent on the international than in previous cycles due in part to the past fall of USD and its energy revolution which entailed huge gains in competitiveness…

As for EZ, no surprise, it will be the weakest economic region in 2015 with 1.1% GDP growth and the persistent risk of deflation (0.6% fcst for 2015).

Bond market shouldn’t sell off: US bond yields should rise but with no bad surprises, says Barclays. Market expects Fed to start tightening in Q4 (not what we hear from other brokers) with Fed fund rates at 0.55% end 2015… Yet central banks should remain supportive for the markets. Says Barclays:

« A mild pickup in growth, low inflation and supportive monetary policy all bode well for risk assets. We continue to support a balanced portfolio with a modest overweight in equities and are especially bullish on Japanese equities, currency hedged. We feel the Japan macro trade has far more room to run. In general, we feel like non-US equities have more upside in 2015, for two reasons. First, EPS growth should be faster outside the US, helped in part by the USD rally. Second, valuations are much lower for markets and sectors outside the US. Sovereign or credit market developments do not explain this gap in performance. Rather, it is driven by investors pricing in high risk premium and very pessimistic assumptions on earnings growth; both of these factors should fade somewhat next year. »

Key risks to this forecast are: geopolitics (Russia-Ukraine not stabilized yet), China asset bubble (how do you say ‘Minsky moment’ in Chinese?), elections in Europe and extremists, uncertainty regarding the success of Abenomics in Japan… In summary, the usual suspects!

Finally some key « investment themes » (apparently that’s still music to the ears of some investors):

« • 2015 is unlikely to see a repeat of the outperformance in fixed income witnessed in 2014: investors should maintain a balanced portfolio with a modest preference for equities.
• We see the Fed commencing rate hikes in mid-2015: expect more bear flattening, lacklustre risk-adjusted portfolio returns, underperformance of US equities and lower year-on-year US equity returns.
• More policy divergence supports a higher US dollar: also look for lower gold prices, outperformance of non-US DM vs. EM equities and small cap outperformance.

• We expect lower oil prices to persist: upside risks for consumer sectors, EM Asia equities and INR FX and local rates, while energy equities, credit, most oil-linked currencies and inflation breakevens are already priced for low oil prices.
• BoJ and GPIF announcements have reignited the Japan macro trade: stay overweight Japan equities (currency hedged) and look for higher inflation breakevens. JGBs are likely to remain supported by the BOJ for now.
• 2015 is a pivotal year for Europe: policy success would be felt most by equities, while failure is a risk to both equities and increasingly expensive peripheral debt; stay short the euro and expect a lacklustre year for bunds.
• With global growth set to improve modestly in 2015, growth-linked assets look increasingly cheap.
• The macro backdrop for EM will be challenging in 2015, but much of this is priced: start the year neutral, but with a preference for local currency EM debt and EM Asia equities; India also benefits from lower oil prices and a robust reform agenda; tactically shift from USD-linked EM HY to US HY.
• The three main consensus risks heading into 2015 are: 1) high expectations for better US growth and a higher dollar; 2) very little concern about Fed policy; 3) a very high level of negativity around China’s economy. »

Here’s the view per asset class, updated every quarter:

Source: Barclays

Source: Barclays

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