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Barclays: Buy the coming market sell-offs

Get ready for more volatility.

At a global outlook briefing Thursday, Barclays said investors should expect to find buy opportunities from more sharp pullbacks in stocks similar to the one in August.

"China is transitioning to a services (oriented economy). Even if this transition succeeds, slowdown in the old (manufacturing) economy, … through which China is deeply connected to the rest of the world, will continue to cause volatility," said Ajay Rajadhyaksha, head of macro research at Barclays. "So what happened in August '15, … risk-off, is something I think we'll see more often in the next couple of years."

We'll "certainly see volatility pick up over the next few quarters as opposed to the last few years," he said.

Traders work on the floor of the New York Stock Exchange.
Brendan McDermid | Reuters
Traders work on the floor of the New York Stock Exchange.

The major U.S. averages plunged more than 10 percent into correction territory in August after the surprise devaluation of the Chinese yuan added to concerns about the negative impact to global growth from slowdown in China's economy.

Several analysts have said October's gains of more than 8 percent in stocks was just a sharp upward swing, helped by hopes of accommodative monetary policy, after the dramatic late-summer decline.

Since that stellar performance, stocks are currently lower on the month, with most of the selling in the last few days. The S&P 500 plunged nearly 1 percent into negative territory for the year in intraday trade Thursday as oil prices fell sharply.

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Barclays head of U.S. equity strategy research Jonathan Glionna expects continued low returns on the S&P 500 next year, similar to 2015.

But continued evidence of slower economic growth around the world, especially in China, could trigger short-term drops in the stock market.

"August '15 was an overreaction (to an event) which, in hindsight, wasn't a great deal," Rajadhyaksha said. "The reaction it did was because investors had gotten so used to the benign financial environment. It's amplified by low liquidity."

Still, he said any correction would not be sustained and would be an "opportunity to position for recovery."

With the Federal Reserve expected to raise rates in December and stabilization in commodity markets, Glionna said leadership will shift from growth to value stocks in sectors such as financials and materials.

The firm is no longer recommending consumer discretionary based on expensive valuation and historical tendency to underperform during the early stages of tightening cycles.

From a regional perspective, Glionna said European equities offer better value than those in the United States given significantly higher earnings growth expectations.

"Regional rotation should occur out of U.S. equities into Europe," he said.

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A dramatic short-term pullback in stocks would also temporarily pressure oil prices and push up the VIX, dampening merger and acquisition activity, Barclays analysts said.