Those are two of the conclusions that came out of Barclays quarterly outlook report that titled “Stay with equities for now” that the firm released on Thursday. The title of the report comes as the firm foresees a continued wide margin between the performance of equities relative to bond investments. But the same themes that the firm identified three months ago—“mediocre economic growth, tight fiscal policy and extraordinarily easy monetary policy, low volatility and inter-market correlations”—still prevail, according to the report.
“But our optimism only goes so far this time around, and we are less confident that the favorable market environment will extend throughout the year,” Barclays Head of Research Larry Kantor said.
Among Barclays’ predictions are a heightened risk for a correction after the equities markets have come “too far, too fast” this year. But any market declines will not reach the same double-digit magnitude that we have seen in recent years, Barclays predicts. The firm credits several forces that will continue to support equities: the unlikelihood of a cyclical downturn combined with positive valuations compared to fixed income and continuing support from the Federal Reserve.
When it comes to fixed income, Barclays said that holding bonds could serve as a hedge against equity positions in portfolios, but provides little upside. A massive selloff of bonds is not likely, however, if central bank purchases and zero rates continue. Because there has not been a widespread selloff for fixed income, even as equities investments have risen, Barclays said there is no evidence that a “great rotation” is in play.
This latest forecast from Barclays holds the most positive investor sentiments so far for the U.S. coming out of the financial crisis. That comes even though U.S. GDP will take an estimated 1.8% hit, Barclays predicts, following spending cuts and tax increases. Two factors that bode well for U.S. markets now include continued monetary support from the Fed and growth expectations.
When it comes to equities in other areas of the world, Barclays said it favors developed markets—including the U.K., Japan and Spain—over emerging markets due to valuations and cyclical forces. Emerging markets equities have underperformed in the last two years, and developed markets are poised for more growth by contrast. Emerging market debt, however, could provide more opportunity, with Barclays forecasting 7% returns for local currency bonds and 4% for hard currency bonds.