Investors should avoid a flight from risky assets, says Barclays Capital

Barclays Capital remains optimistic that the economic slowdown is temporary and advises investors to stick with risk-neutral weightings rather than withdrawing from risk altogether, as outlined in its latest Global Outlook report.

The US is one market that is suffering a sluggish recovery, and any progress that has been made is "a balance sheet recovery", said Piero Ghezzi, head of economics, emerging markets and FX research at Barclays Capital in London, speaking at the Global Outlook briefing today, July 23.

"Those tend to be a lot weaker," he said. "Compared to previous recoveries the US has disappointed significantly." Looking forward, it is "difficult to be too optimistic", he added, though he conceded that the economy could show some growth in the short term.

The end of the second round of quantitative easing (QE2) in the US has sparked much speculation about how it will affect the market. Paul Robinson, head of FX strategy at BarCap in London, said it is unlikely to have a significant impact on the dollar as markets were expecting it.

What could prove more significant for the dollar is the potential raising of the US debt ceiling later this year, and volatility will pick up significantly in July as a result, said Robinson.

He also noted that the eurozone sovereign debt crisis seems not to have been priced into the euro-dollar exchange rate, but movements in the euro-Swiss franc rate tell a different story. As for Greece, he predicted that if the "can gets kicked down the road the euro will pick up a bit", but uncertainties will remain. His recommendation was to buy the US dollar and sell the Swiss franc.

Ghezzi said only two possible solutions exist to the Greek debt crisis: a full bailout by the EU or a debt restructuring. Either option would be traumatic, but it is likely that significant debt restructuring will be avoided in the near term to prevent contagion, he said.

However, concern is already mounting about other European markets, as Antonio Garcia Pascual, chief southern European economist at BarCap explained. "The challenge in Greece is significantly higher than that in Ireland and Portugal. But we would argue that the debt dynamics are not clear-cut, which is why the markets remain concerned."

It is still too early to see which way Portugal will go, he said, though he was more positive about Ireland and said the current economic programme could work without debt restructuring.

Moving on to the Spanish market, Pascual focused on the mergers of the savings banks and the initial public offerings (IPOs) of the new entities that are due to take place later this year. He warned of a risk that the IPOs will fail and that even if they are successful a funding gap might remain. There are also regional risks within Spain, but he said there had been progress in the country. The markets are now focusing on Italy, where there is political risk and "little room for deviation from its targets".

The news is not all bad, however. Opportunities exist in the commodities market, noted Kevin Norrish, commodities researcher at BarCap in London. Norrish is bullish on gold, copper, corn and oil.

The report also concluded that buying opportunities may exist in equities and some credit markets – particularly the US – come the third quarter of this year, but they are likely to be limited as the problems that are causing market volatility will remain.