The time is not yet to sell. That would be the main message from Barclays. Although the British bank believes that the bulk of the rebound seen in the first quarter is likely behind us, it continues to find the risk-reward for equities more attractive than for bonds, and advise using the cheap volatility to hedge downside risks.
The bank puts forward four arguments in favor of continuing the increase in the second quarter:
The positioning is still bearish: despite the rebound, flows remained negative on equities and biases are rather defensive.
The main central banks, the Fed and the ECB, are in a very accommodating mode.
The global growth phase is not yet complete.
The geopolitical risk is well integrated.
But while this may seem tempting, Barclays is careful not to compare 2019 to 2016, as monetary conditions are less favorable, the cycle is more advanced and China should not over-stimulate growth. The year will not be exceptional for corporate results, but neither will it be negative, while the valuation multiples are correct (see EP table below).
Source: Barclays and IBES
However, it points out that following the December fall, equities rebounded strongly in Q1, and enjoyed their second best start to the year since 1991. Most asset classes delivered positive returns last quarter, but equities outperformed the most.
Source Barclays with Bloomberg and Datastream
The bank is cautiously optimistic in its choices, but also selective. It prefers cheap cyclicals to expensive defensive measures. Mining, building materials and indestructible luxury are the sectors with the best Beta, according to Barclays, which also overweight real estate, insurance and energy. On the other hand, health and basic consumer goods are to be excluded.
It also isnt particularly worried about the recent yield curve inversion, stating that the yield curve typically inverted when the business cycle was 70-75% advanced, and thus it did not mark the end of the cycle. It adds that equities always peaked some time after the yield curve inverted, by 11 months on average. Their average performance up to the peak was 13%.
However, the institution has indexed targets for the end of December that are fairly close to current levels, a sign that it will be necessary to be selective.