Barclays expects European equities to 'grind higher', despite near-term risks

Barclays believes European equities will continue to move higher this year, despite the potential for near-term volatility.

In a note on European equity strategy, the bank said "expectations are high, growth momentum is slowing, vaccine rollout is patchy and retail exuberance is unsettling.

"Consolidation thus seems logical, and volatility could persist in the near term."

But it argued: "We think equities will continue to grind higher, as the growth/policy trade-off remains supportive.

"The direction of travel is towards stronger growth, as effective vaccines mean reopening is a matter of when, not if, and more stimulus is coming. Meanwhile, central banks are in no rush to tighten liquidity, despite early signs of an inflation pick up."

It also argued that while the earnings hurdle for 2021 was high, it was not out of reach. "Easy comparatives should help earnings, but high expectations require economic growth to keep accelerating. So far, the fourth quarter results confirm recovery is on track and earnings per share revisions remain well orientated."

Barclays said it preferred rest of the world (RoW) equities to Wall Street. "US equities benefited from their relative safe-haven status and large tech weight for most of 2020, but look stretched from a valuation and positioning standpoint.

"We find better risk-reward in RoW equities, which should benefit from a broadening of the reflation trade in 2021 and have been less inflated by excess liquidity."

Regarding the UK stock market, Barclays said that after its sharp underperformance last year, there is a better risk-reward.

"It is under-owned, cheap and benefits from reflation given its value tilt. Defensive sector weights make the UK an unlikely outperformer early in the cycle, but provide a hedge too. Brexit will likely hit GDP for years to come and the UK’s Covid outcome is among the works - but consequently, it could see a bigger activity rebound if the vaccine rollout continues to succeed.

"The binary and Brexit headlines-driven FTSE 100/FTSE 250 trade seems obsolete, but sterling direction remains a key driver. More strength due to rising hopes of early reopening could thus favour domestic plays over exporters."