Barclays: Stick With Stocks, For Now

Barclays global outlook released Thursday tells investors not to abandon stocks, even though equity markets may have come too far too fast.

The rationale: mediocre economic growth, tight fiscal policy, extraordinarily easy monetary policy, low volatility and inter-market correlation all mean that equities will outperform fixed income “by a wide margin.”

Though “investor sentiment may have become overly optimistic,” Larry Kantor, head of research at Barclays, writes that�any correction is likely to be contained “given persistent fundamental support for equities � continued policy support, low risk of cyclical downturn and attractive valuations relative to fixed income.”

Update: Kantor tells�Bloomberg Radio:

” ‘For now’�is important because we have been very bullish on the stock market. We can finally see the end of it here, but not for a few months. We are sticking with the long equity trade … definitely for the next two months.” �Kantor says we are ripe for a correction, but not on the order of 10% in 2010. “We would be buyers on dips.”

Barclays prefers developed market equities, especially in the US, Japan, the UK and Spain. And it prefers fixed income to equities in emerging markets, although “prospective returns are limited, given the strong performance last year.”

Key forecasts for equities:

• “Our 2013 forecast was based on a recovery in business confidence, leading to a reacceleration of earnings growth and capital spending. Unlike 2010-12, shocks from public policy seem less likely, leading to a more benign correction if the growth outlook pauses.
• For the next stage of the equity risk premium compression driven rally to materialise, headline risks would need to dissipate or profitability to stabilise. We are optimistic on both fronts and upgrade our STOXX 600 target for 2013 to 330 (11% upside).”

Key recommendations for equities:

• “Given the prospect of a near-term hit to US growth as a result of fiscal tightening, US stocks with bond-like characteristics should outperform, due to their generally defensive nature, while domestic cyclicals should struggle if earnings disappoint. Reduced fiscal policy uncertainty should benefit stocks leveraged to capital spending.
• In Europe, we prefer the financials sector that could benefit most from an inflection in profit margins. We retain our overweight on the UK and peripheral European markets.”