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Market View is a summary of Barclays' economic outlook. While it may contain occasional references to potential market movements, it should not be taken as a recommendation of any specific investment.
Market outlook – April 2013
Stock markets across the developed world had a strong first quarter. While there is no shortage of potential triggers for a setback in performance, we continue to think that the primary trend is upwards, and we would use any fall in the market to add to our holdings in favoured securities.
The global business cycle: clouds continue to lift
The most widely-watched economic indicators continue to suggest that global economic activity is stabilising. This should support corporate profitability and boost investor risk appetite.
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Considered alongside key measurements for valuing the market, it appeared that developed-market stocks remain inexpensive (both historically and relative to other asset classes) – even after their rally. As expected the regional pictures diverge. Europe remains the weakest link economically, and eurozone politicians seem almost determined to snatch defeat from the jaws of victory in their latest handling of the peripheral debt crisis.
Eurozone: the troika tripped
Eurozone politicians and policymakers are demonstrating why we’ve long advised that the euro’s long-term crisis is far from over. In making bank depositors in Cyprus share the costs of rebuilding the local bank system, the region’s authorities and finance ministers, seem to be playing the role of school bully, picking on the smallest kid in the playground. Those authorities may have forgotten that the other, not-so-small kids watching in trepidation may decide to do something to protect themselves. If Spanish bank depositors fear that they may become a target, much of the good work done in stabilising the euro markets could be undone.
The (modest) revival in market volatility that events in Cyprus inspired – similar to that caused by the Italian election result – is certainly a reminder that the long journey to a lasting resolution to Europe’s crisis will not be a smooth one. But this does not mean that investors need stay on the edge of their seats: the big picture, as we see it, has not altered. Provided the European Central Bank stands ready to support failing economies in the region, any bouts of market turbulence are unlikely to have a lasting impact on portfolios.
The ongoing short-term risk stemming from the disappointing pace of the eurozone recovery should not obscure the fact that, as a relatively volatile market, eurozone stocks can actually outperform the wider developed markets if global risk appetite continues to improve. The region’s stocks, like many others, remain inexpensive, even after their rally.
Among the asset classes, we strongly prefer corporate to government securities, and stocks to most bonds. But eurozone bonds – like its stocks – have a good chance of outperforming their developed world benchmarks.
UK: chaste, but not yet
The UK government is sticking grimly to its battered ‘plan A’. This need not condemn the UK to recession, or even stagnation. The latest employment and retail sales data suggest that the economy is not quite as fragile as the GDP numbers make it appear.
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We still think the UK stock market is likely to lag the US and Continental Europe, but sterling’s recent weakness will boost the international earnings of companies quoted on the UK exchange. And even after their rally, we still expect UK stocks to outperform government bonds (or gilts) — and by more than enough to compensate for risk. The 10-year gilt is currently yielding 1.9%.
Indeed, we think that gilts will underperform not just local stocks, but other high-quality government bonds – not because of credit concerns – but because they are simply very expensive. The UK remains relatively inflation prone, and we expect this period of above-target inflation to continue until 2015.
The monetary policy review announced during March’s budget is unlikely to change the economic climate or the position of the central bank. Nonetheless, it will not reassure a currency market that thinks the UK has ‘gone soft’ on inflation (understandably, given that track record). Sterling is already pretty competitive, but we think the dollar will remain stronger for a while yet.
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