Investing.com - The second quarter is coming to an end, and analysts at Barclays have taken a look at the investment outlook for global equities in the second half of the year.
Global Equities Forecast Next 6 Months (Second-Half 2024)
It has been another good quarter for investors, with global equities led higher by strong gains for the dominant U.S. Big Tech sector.
Underpinning these benign markets is steady global growth, with major players balancing each other, according to analysts at Barclays, in a note dated June 20.
China is having a weak second quarter, after a strong first, but the euro area is finally seeing a cyclical recovery after two years of stagnation. India has been an outperformer for a couple of years and looks set to grow at around 7% in 2024 as well.
But one of the biggest reasons for a solid macro backdrop is still the world’s largest economy.
Every so often, the "U.S. is finally running out of steam" narrative seems to resurface, most recently, a few slightly softer data points in April led to renewed interest in the theme. Yet the underlying economy has remained very stable, Barclays added.
“We expect the U.S. to expand 2.5% in 2024, right in line with 2023,” analysts at the British bank said.
Valuations might seem full, but this is still a supportive environment for risk assets. This has led the bank to maintain its overweight stance on global equities over fixed income for the third straight quarter, even while expressing caution given elevated valuations and rising political and trade risks.
“We prefer global equities to fixed income once more, given a backdrop of solid global growth and a gradual easing cycle. But investors should keep a wary eye on tail scenarios, especially in light of political risks,” Barclays said.
2024 Political Risks For Investors
Despite this optimism, it’s clear that political risks are rising.
It started with the EU Parliamentary elections, where right-wing parties in Germany (AFD) and France (National Rally) made gains. But political risk really ramped up when French President Emmanuel Macron responded with snap parliamentary elections.
Investors cannot ignore the tail risk that if President Macron’s party gets a severe drubbing, he decides to resign and National Rally ends up controlling both Parliament and the Elysee.
“Political risk is likely to stay elevated through higher risk premium in European financial assets until at least July 7, and possibly for months beyond,” Barclays added.
Elsewhere, election results in Mexico, India and South Africa have caused upheavals in local markets. The U.K. elections will likely (if polls are correct) bring in a new government, and then the U.S. comes into the equation.
Polls suggest the Senate is likely to go Republican; the Democrats are defending far more seats and Senator Joe Manchin is not running for re-election in West Virginia. The House is more likely than not to go Democratic. And the Presidential election remains too close to call in our view, dependent on factors like early voting, election-day turnout, etc. in just a handful of states.
“U.S. politics is increasingly likely to drive market focus as November approaches,” Barclays said.
Two major issues spring to mind.
U.S. President Joe Biden imposed two rounds of tariffs on China last month, on roughly $18 billion of imports in strategically important sectors (including a 100% tax on Chinese electric vehicles).
However, this might prove to be just a starter if former President Donald Trump wins, given he has repeatedly promised heavy tariffs, including a blanket 10% tariff on all imports into the U.S., as well as much larger tariffs on specific imports from exporting countries, including China but also Europe and others.
And last week, the former President mooted the idea of scrapping income tax altogether and offsetting the revenue loss with an ‘all-tariff’ policy.
The 2018 trade war between the US and China seemed to avoid the worst-case outcomes critics had feared, but the risks associated with a global trade war appear greater this time around.
“This is one of the biggest risks for the world economy entering 2025 and will be in increasing focus as fall approaches,” analysts at the British bank said.
Another macro question related to U.S. politics is what happens if U.S. labor supply is constrained by a slowing in the flow of migrant workers, as former President Trump has not only vowed to crack down on unauthorized immigration, but also said his government will round up and deport millions of undocumented workers.
Are AI Stocks Still A Good Investment Opportunity?
Megacap tech stocks have been increasing capital expenditure more than 40% year-on-year, and this ramp-up provides opportunity in sub-themes, especially where capacity bottlenecks exist.
“We believe that if the AI demand is to sustain, the rally will need to broaden into other sub-segments such as data center interconnect (ie, the movement of data from one compute/switching node to another),” Barclays added.
As compute demands grow, this will ultimately require larger compute nodes and therefore 'clustering', which will also require further densification of interconnect.
“We believe the names enabling more efficient interconnect in segments such as module OEMs [original equipment manufacturer], analog and DSP [digital service provider] providers will drive the second wave of AI investments and are still under-priced for the opportunity set,” the bank added.
How To Position For 2H 2024
Barclays maintains its base case year-end 2024 S&P 500 price target at 5300, although it thinks risks are tilted to the upside.
“In our bull case scenario, in which ex-Tech EPS revisions have bottomed and Big Tech captures an even higher forward valuation based on continued momentum in upward revisions, the S&P 500 could go to 6050,” Barclays said.
The U.K. bank has downgraded its tactical “overweight” view on European equities to “medium weight” after the French election was called.
“Positioning looks quite long; summer seasonality is about to kick in; and elections not just in France, but the U.K. and U.S. as well, are adding to uncertainty. Near-term price action could therefore be choppier, but medium term we still believe ‘Goldilocks-ish’ data, range-bound yields, and resilient earnings continue to favor equities as an asset class,” Barclays said.
The bank’s price targets are 545 for Stoxx 600 and 8300 for FTSE 100, implying low to mid-single-digit upside into year-end.
Barclays has also made adjustments to its sector allocation, taking some of the reflationary stance off the table.
It downgraded Energy to “underweight” from “overweight” on faltering oil prices and downgraded Autos to “underweight”.
On the flip side, we have upgraded both Staples and Utilities to “medium weight” from “underweight”, partly to close defensive underweight stances, but also to reduce the “underweight” long-duration sector exposure they brought, as rate-cutting cycle gets going in Europe.
We have also added to consumer exposure by raising Retail to “overweight” and added some long-duration exposure by taking Real Estate to “overweight”.
Stocks That Offer Drawdown Safety
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