Rising yields and dearer oil should not be feared, Barclays says
Do not despair, equity strategists at Barclays Research told clients.
Yes, bond yields and the oil price were hitting fresh highs, apparently sparking investor concern.
But both were in fact a reflection of the resilient backdrop in terms of nominal rates of growth; that is to say, not adjusted for inflation.
And that was positive for shares, Barclays said.
Nevertheless, the return of the so-called 'reflation trade' could be expected to see investors switch-out of 'Growth' (Healthcare, Materials, IT, Consumer discretionary, Consumer staples and Industrials) and 'Defensive' names and into 'Value' (Financials, Energy, Utilities, Telecoms and Real Estate) and 'Cyclicals'.
Of all the different value sub-sectors, Energy scored best on Barclays's sector scorecard, a ranking of sectors based on their relative scores on seven variables: Price momentum (20% weighting), P/Book (10%), Price-to-earnings (15%), dividend yield (5%), EPS growth (20%), EPS revisions (20%) and return on equity (10%).
There was one caveat however, rising bond yields in Developed Markets, together with dearer oil and the strong US dollar, would not be helpful for Emerging Markets, prompting Barclays to remain "cautious" towards EMs.
"The correlation between bonds and equities is firmly negative and the ytd de-rating in P/E multiples should provide some cushion to stocks if bond yields were to increase further. We note that the latest move up in bond yields was accompanied by a steepening of the yield curve, which should be welcomed."