With inflation fears persisting and the economic cycle maturing, Barclays sees a period of higher volatility and lower returns for European stock markets.
Yet Barclays retains a positive outlook for equities, arguing that the TINA principle still prevails, with fund inflows having slowed lately. With price-to-earnings ratios having compressed, the bank expects future returns to be lower, but still positive.
Although growth is slowing and inflation is rising, Barclays does not foresee a "stagflation" scenario, since demand remains strong and financial conditions loose. "Investors still have dry powder given money markets' of $4.5 trillion. Equities are the only asset class to produce positive real yields and tend to perform well in a higher inflation regime," Cau added.
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