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Regional disparities create opportunities in foreign exchange markets: Barclays

BBR Staff Writer Published 25 September 2014

Disparities in economic conditions and monetary policies have grown between the US and euro area, creating significant opportunities in foreign exchange markets as well as the relative performance of bonds and equities, according to Barclays’ latest flagship quarterly research publication Global Outlook: Regional disparities present strategic opportunities.

"The global recovery continues to be weak, but the US appears to be reasserting its traditional role as leader of the global business cycle.

Meanwhile, the euro area's nascent recovery has stalled and inflation has plunged to dangerously low levels, leading the European Central Bank to announce that it is prepared to embark on outright quantitative easing," said Larry Kantor, Head of Research. "Against this backdrop, we recommend long US dollar positions, especially against the euro."

These regional disparities also have important implications for equity markets. Policy support in the euro area and Japan, as well as relative valuations, suggest that investors should overweight stocks there versus the US, but any such positions should be currency hedged for non-local investors.

Although expected returns on equities remain far above those on bonds, increasingly higher stock valuations and a still strong demand for safe assets call for maintaining a relatively balanced portfolio between equities and bonds, with only a modest overweight in equities.

Fixed income markets have been quite resilient in the face of the reduction in Federal Reserve asset purchases and prospective rate hikes. Still, markets seem too complacent about the timing and speed of the Federal Reserve tightening cycle, and investors should expect yields to rise and the yield curve to flatten by year-end.

Other recommendations in the Global Outlook include:

Move to neutral on emerging market equities
Continue to stay short US fixed income relative to Europe
Buy on any significant sell-off in US stocks or high yield bonds
Barclays' Global Outlook research report, published quarterly, provides an assessment of all major economies and outlines the likely implications for global financial markets.

Source: Company Press Release