Drop Defensive Trade, No Double Dip Ahead: Barclays
Investors have reason to be more optimistic again and should start taking on more risk as the likelihood of a new global recession has faded, Larry Kantor, Head of Research at Barclays Capital said on Friday.
In a Global Outlook report issued in December, Barclays said it was time for investors to take a cautious step forward, arguing there were signs of a solution to the euro zone debt crisis and that the risk of a global slowdown had decreased.
"In the month or so that's passed we feel even more optimistic," Kantor said at Barclays Global Macro Outlook conference.
Although a downturn in the euro area had now been confirmed, growth was accelerating in the United States and a hard landing in China looked unlikely, according to analysts.
In addition, the European Central Bank stepped up with a huge injection of liquidity in December, easing concerns in Europe somewhat.
"It proved to be a big deal," Kantor said of the ECB's long-term refinancing operation, in which it offered banks unlimited 3-year loans at its record low interest rate of 3 percent.
Kantor said political change in Italy and Spain had also contributed to Barclays' optimism. The governments now in place there offer the best chance of restoring confidence, he said.
"The data are just not consistent with collapse," Kantor said.
Although the sovereign debt crisis was "far from over", there were no signs of a new global recession, he said.
He pointed out that before a collapse valuations are very high and there is a lot of confidence.
By contrast, investors are "cautious, preparing for bad events" at the moment.
"Businesses have tons of cash on their balance sheets," he said. "It makes you less vulnerable to a collapse."
But the world is also not poised for a normal recovery, Kantor said.
"At the end of the day you have to restore confidence for investors that the debt will be repaid...You will need an enforcable fiscal framework (in the euro zone) and a common funding mechanism (like eurobonds)," he said.