Investing.com -- Barclays (LON:BARC) has adopted a more cautious stance on European small-cap stocks, downgrading their outlook to neutral.
This shift, outlined in a note dated Monday, reflects the dual challenges posed by rising long-term yields and a stagnating European economic recovery.
Higher yields, driven by a hawkish stance from the U.S. Federal Reserve and strong U.S. economic data, have exerted significant pressure on small-cap equities in Europe.
Small-cap stocks, which typically rely on lower interest rates and robust local economic activity, have struggled under the weight of surging borrowing costs.
Barclays analysts observed that these market conditions have amplified the disadvantages for rate-sensitive assets, such as small caps, especially as European macroeconomic data continues to underperform expectations.
The downgrade comes despite the historically attractive valuation levels of European small-cap stocks, which are trading near 20-year lows relative to the broader market.
Barclays analysts noted that while these valuations remain appealing, the persistent headwinds from rising rates and the lack of a clear upturn in activity data warrant a more neutral position until the macroeconomic environment improves.
The broader European equity landscape has seen mixed performances across various investment styles.
Barclays remains optimistic about value and quality-yield factors, which have benefited from the current rate environment.
Conversely, the analysts maintains a negative outlook on low volatility strategies, citing their extended valuations and limited upside in a potentially improving growth scenario.
This recalibration of small-cap exposure reflects Barclays’ strategy to balance cyclical opportunities with the prevailing macroeconomic risks.
The brokerage emphasizes the need for greater clarity in European economic recovery before reassessing its stance on this segment.