Investing.com -- Barclays analysts suggested in a note Wednesday that while equities are at record highs, overall market positioning is "not stretched," leaving room for further gains as systematic investors could chase the rally if volatility remains subdued.
The bank highlighted that despite strong retail buying and elevated mutual fund flows, exposure from hedge funds, CTAs, and other systematic strategies has not fully recovered since the summer selloff, indicating untapped potential for further investment in equities.
"Sep/Oct seasonality, buybacks blackout ahead of Q3 earnings and US elections uncertainty are near-term headwinds," acknowledged Barclays.
However, they believe a combined "Fed/China put"—the Federal Reserve’s recent rate cuts and stimulus measures in China—could spark a fear of missing out (FOMO) among investors and fuel a risk-on rotation into 2025.
The note also highlighted sectoral and geographic shifts. While U.S. stocks continue to lead global equity inflows, demand for emerging markets (excluding China) has picked up, driven by a weaker dollar.
On the other hand, Barclays says European equities remain less favored due to macro and political challenges. They add that the cyclical sectors, such as autos, miners, and chemicals, appear under-owned, presenting the potential for further upside as recent short-covering has already begun.
The bank sees the current market setup as a "pain trade" for those underexposed to cyclicals, particularly in China-exposed sectors.
The analysts pointed out that easing measures from China could lead to a similar rally to that seen in April, when China-exposed stocks surged amid light positioning. They also noted that the relatively low volatility in mining stocks, compared to the auto sector, presents tactical opportunities for risk-limited upside exposure.