Stocks are ‘not stretched,’ allowing for potential gains: Barclays

Barclays analysts noted on Wednesday that even though equities are reaching record highs, the overall market positioning remains “not stretched,” suggesting there is potential for further gains. This situation might encourage systematic investors to pursue the rally, provided volatility stays low.

The bank pointed out that while retail buying is strong and mutual fund inflows are elevated, the exposure from hedge funds, commodity trading advisors (CTAs), and other systematic strategies has yet to fully rebound since the summer’s market downturn. This indicates there is still room for increased investment in equities.

Barclays acknowledged that there are short-term headwinds, including seasonal trends in September and October, upcoming buyback blackouts preceding Q3 earnings, and uncertainties surrounding the U.S. elections.

Nevertheless, they believe that combined stimuli from the Federal Reserve’s recent rate cuts and China’s economic measures could create a fear of missing out (FOMO) among investors, potentially triggering a risk-on trend that could last into 2025.

The report also emphasized shifts in sector and geographic preferences. While U.S. stocks continue to attract global equity inflows, interest in emerging markets (excluding China) is rising, driven by a weakening dollar.

On the downside, European equities are less favored due to various macroeconomic and political challenges. According to Barclays, cyclical sectors such as automobiles, mining, and chemicals are currently underrepresented, which could signal opportunities for further gains, particularly as short-covering activities are already in motion.

The analysts described the current market environment as a “pain trade” for those who are underexposed to cyclical investments, especially within sectors connected to China. They highlighted that the easing measures from China could potentially mirror the rally witnessed in April when stocks linked to China experienced significant gains amid light positioning. Furthermore, they noted that mining stocks exhibit relatively low volatility compared to the auto sector, creating tactical opportunities for those looking for risk-adverse exposure.