Barclays: First time feeling concerned about the performance of risk assets, leaning towards allocating more to bonds than stocks

According to the Zhitong Finance APP, the Barclays research team has published a macroeconomic outlook report indicating that, given the supply shocks in the labor market, significant policy uncertainty, and the rising risks of global trade conflicts, they have significantly lowered their forecast for U.S. economic growth in 2025, expecting a year-on-year growth rate of only 0.7% in the fourth quarter. Although there was a pullback in the U.S. economy in the first quarter, Barclays is concerned about the performance of risk assets for the first time in recent quarters. While concerns about deficits have intensified and the bond market has recently rebounded, there is more optimism about core fixed income assets compared to stocks.

Global economic growth is expected to slow significantly in the fourth quarter

The global economy is expected to grow by 2.5% year-on-year in the fourth quarter of 2025, with an annual growth forecast of 2.9%, a significant slowdown compared to 2024. Even so, given that core inflation has remained stubbornly high, commodity prices are expected to rise in the coming months, so a rapid rate-cutting cycle is unlikely. It is predicted that the Federal Reserve will only cut rates twice, while the European Central Bank will lower the deposit rate to 1.5% by the end of the year.

Although Germany's fiscal stimulus measures will impact institutional reforms, their effect on economic growth is not expected to materialize until 2026. If the U.S. imposes high tariffs on Europe, growth in Europe in 2025 could slow significantly. If the U.S. imposes a 10% tariff and Germany responds accordingly, the eurozone's year-on-year growth in the fourth quarter of 2025 is expected to be 0.4% (annual growth of 0.7%).

U.S. interest rates are expected to further diverge from Europe

Barclays states that financial markets have been in continuous turmoil, particularly evident in the past month. At the beginning of the year, the U.S. exceptionalism narrative escalated, giving rise to several popular trading strategies. Most investors that Barclays has engaged with are bullish on the dollar and are overweight on U.S. stocks, expecting U.S. interest rates to further diverge from Europe. However, the emergence of DeepSeek has led to increased policy uncertainty in the U.S., heightened threats from trade tariffs, and changes in European fiscal policy.

As the first quarter comes to a close, the U.S. stock market has fallen by 3% to 6% year-to-date, significantly lagging behind European and Chinese stock markets. Additionally, the interest rate spread between the U.S. and Europe has narrowed, and the dollar has depreciated against most major currencies. Compared to a few months ago, uncertainty has increased, and more changes are expected in the future.

The global trade environment will be a major driving force for financial markets in the coming months. April 2, referred to by Trump as "Liberation Day," will set the tone for the following months. If the tariffs implemented are broad (with almost no exemptions) and the rates are high, risk assets will face challenges in the second quarter. On the other hand, if the exemptions are extensive, or if the U.S. continues to delay actual tariff actions (such as repeatedly postponing tariffs on Mexico and Canada), risk assets may rebound.

The market has underestimated the risk of tariff shocks in early April, currently leaning more towards core fixed income assets rather than global stocks

Global trade frictions will continue and have already caused significant damage, making a substantial slowdown in economic growth a foregone conclusion. The key question is whether the situation will worsen further and to what extent. Barclays believes that, in the short term, the market has underestimated the risk of tariff shocks in early April. For example, the forward volatility of stocks around April 2 did not show a significant increase, and the Mexican peso and Canadian dollar did not depreciate significantly due to the delay in tariffs in early March Risk assets are unlikely to rebound in this context; therefore, there is a tendency to seek long-term bond investment opportunities in markets that are susceptible to central bank policies, excluding Japan.

From an asset allocation perspective, although valuations have become excessive, Barclays has been overweight in global equities rather than fixed income assets over the past few quarters. However, the current policy risk is largely a downside risk. Despite the challenges faced by bonds, such as rising commodity prices and poor fiscal prospects in Western countries, there is currently a preference for core fixed income assets over global equities. Overall, there is a tendency to maintain a defensive stance until policies become clearer, and it is not expected that policies will become clear in the short term. In the coming months, there may be situations such as tariff retaliation, new negotiations, exemptions, and exceptions