“Despite the underperformance of risk, we find elements of April's returns encouraging and remain of the view that investors are paid to hold market risk, and should continue to do so until a catalyst for a market downdraft is more imminent than we now consider likely,” Michael Gavin, the head emerging markets strategy at Barclays Capital, wrote in a note to clients on Tuesday.
Not having expected the speed with which the crisis surrounding Spain and its bond market hit, Gavin said investors still expect a resilient recovery for the U.S. and a soft landing for China despite some disappointing data from the world’s two biggest economies.
“In that context, the underperformance of equities in general, and of European credit and equities in particular, is not surprising,” said Gavin, who is encouraged by the fact that sell-offs where limited in magnitude and followed by swift recoveries.
“This seems consistent with our view that investors, while nowhere nearly so conservatively positioned as in late 2011, are not over their skis in terms of financial or psychological positioning,” he added.
Fear-led market correlations did not materialize in April according to Gavin, who notes U.S. stocks outperformed those in Europe . Emerging market stocks did not trade in line with each other either, with Chinese stocks gaining as the Brazilian market fell by 7 percent on the month.
“On balance, April leaves us (even) more alert to the possibility that developments in Europe may undermine market sentiment, but otherwise largely reinforced in the views that we adopted a month ago,” Gavin wrote.
“It is difficult to imagine a sustained bull market in equities while the economic recovery remains lackluster in much of the world and systemic risks remain so high,” said Gavin, who believes investors are well aware of the big macro risks facing the global economy and markets.
“We think investors should remain engaged in markets until a catalyst for a market downdraft is not only identifiable in principle, but also reasonably imminent.”