It believes the catalyst for further volatility in equity markets will be quantitative easing (QE) tapering by the US Federal Reserve. However the company, via its latest Compass report, expects economic growth to be a little firmer looking further into 2014.
The recovery will survive tapering, in Barclays’ view, because underlying growth is not driven by central banks or financial balance sheets, but rather by the availability of adequate labour, land, capital, raw materials, legal and entrepreneurial infrastructure, and perhaps most importantly powerful improvements that stem from new technology and from workers getting better at what they do.
The firm expects growth in developed economies to accelerate slightly and for the US, UK, Europe and Japan to grow together for the first time since 2010. It also believes the lead of the emerging world to narrow further in terms of growth rate.
While it is currently overweight cash, Barclays expects this position to be relatively short lived, with a tactical move from cash back into developed equities following this bout of volatility. On the fixed income side, however, it remains neutral on government bonds and is underweight investment grade and high yield credit.
Ultimately, Barclays believes stock markets can add to gains made during 2013, broadly favouring developed over emerging equities but stressing the need to differentiate between emerging markets. Those countries with significant exports to the developed world, such as Korea, Taiwan, Mexico and Poland look likely to be benefit, although Barclays stressed the latter two look expensive.
