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Barclays recommends investors look to the euro area and Japan

Global Outlook report sees lower inflation and easier monetary policy providing further support to financial asset prices 

The dramatic shifts in energy prices, the US dollar and monetary policies should help to extend the benign market environment seen during this economic recovery, according to Barclays’ latest flagship quarterly research publication Global Outlook: Oil, the dollar and monetary policy: it’s all (or at least mostly) good.

“The plunge in oil prices reduced inflation even further and encouraged additional monetary easing,” said Larry Kantor, Head of Research. “This pushed bond yields even lower and boosted economic growth, which in turn should provide continued support to stocks and corporate bonds.”

The surge in the US dollar has been largely constructive for the global economy, as it redistributes growth and inflation from the US – where excess capacity has shrunk and monetary policy is set to tighten – to the euro area and Japan, where there is still ample excess capacity and deflation is a greater threat. Lower inflation and a stronger US dollar also means the US Federal Reserve can now be more cautious about raising rates than it otherwise would have been, allowing markets to continue to perform well.

Among developed economies, the euro area and Japan should be clear beneficiaries, gaining from lower oil prices, weaker currencies and extreme monetary support. Partly as a result, we believe that stocks in those countries will continue to outperform. Emerging Asia has also benefited from recent market changes, central bank interest rate cuts, and still-strong global technology demand.

However, not all countries and regions are beneficiaries. China has resisted currency depreciation and continued to rein in credit expansion and excessive investment, placing downward pressure on its economy. Latin America, where many countries export commodities, has suffered from the weakness in commodity prices as well as capital outflows due to the strength in the US dollar and the anticipation of US Federal Reserve rate hikes.

Other recommendations in the Global Outlook include:

  • Maintain a neutral balance in portfolios between stocks and bonds
  • Overweight euro area and Japanese stocks
  • Favor a combination of dividend and growth stocks in the US
  • US dollar still has some upside, but the pace is likely to be slower
  • Oil prices are likely to remain low for at least several months

Barclays’ Global Outlook research report, published quarterly, provides an assessment of all major economies and outlines the likely implications for global financial markets.