Barclays sees a 'decent' setup for year-end rally

Investing.com -- Barclays said equity markets are well positioned for a year-end rally, citing “cleaner positioning, better seasonals, resilient earnings, buybacks restart and end of QT” as drivers of further upside into December.

In a note, Barclays analyst Emmanuel Cau commented that “long-only inflows and retail buying were strong in October,” while “Macro HFs and systematic investors (CTAs, risk control funds) pulled back their equity exposure from the highs, as vol rose and momentum trades were unwound.”

As a result, aggregate equity exposure “has dropped back to neutral levels,” setting up a healthier backdrop for markets.

Barclays also believes year-end technicals “look supportive,” with seasonality about to “turn the most positive.”

Cau noted that in years when equities gained more than 20% between January and October, markets “saw further upside in November-December of 5% on average, 75% of the time.”

Earnings and policy conditions are also said to be lending support. “Resilient earnings and lower rates backstop equities against rising cross-asset vol,” wrote Cau, adding that “the Fed potentially ending QT early may help too, as per the 2019 episode.”

The bank feels U.S. equities will continue to dominate global inflows, though “asymmetry for EU/UK has improved” as outflows from Germany paused and hedge funds increased exposure to U.K. domestic stocks.

Barclays also expects “performance chasing into year-end likely favors Cyclicals,” even as Big Tech remains dominant.

Cau remarked that “overall cyclical exposure in EU funds remains light,” which could prompt managers to increase allocations into year-end.

“Pockets of froth” remain, the analyst said, but overall conditions are “a decent set-up for a year-end rally.”

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