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Investors should position for a “less benign” economic and financial environment than the one currently priced into risk assets, especially when it comes to stocks.

So says Ajay Rajadhyaksha, head of macro research at Barclays, who believes that investors should fade “the post-Brexit relief rally in equities given stretched valuations and a cloudy earnings outlook.”

Rajadhyaksha explains why, after years of central bank support, asset allocation is now about choosing the least unattractive investment alternative with stocks, in his opinion, near the bottom of the list.

“It would be much easier if financial assets were priced accordingly, but that is not the case in most major asset classes,” he says. “Asset allocation is now about choosing the least attractive alternative, and equities do not fit the bill in our view.”

Rajadhyaksha suggests that the next few quarters are unlikely to be friendly for equity markets, based on the bank’s global economic outlook.

Sustained equity outperformance should require a resumption of earnings growth. And there are no signs that the corporate earnings tide is on the verge of turning. Our economic base case looks much like the disappointing economic backdrop of the past few quarters, except that we now expect expansions in the UK and Europe to be interrupted by Brexit. Meanwhile, economic recoveries in the US, Germany and Japan appear well advanced, with labor markets close to full employment. We think most major economies could see either a slowdown in growth, or rising aggregate wage costs for the corporate sector, or both.

While Rajadhyaksha believes that stocks could potentially outperform bonds should the global economy manage to “muddle through”, something that Barclays has as its base case scenario, he believes that based on current valuations and risks, the downside is more pronounced for stocks.

Equities may plausibly outperform bonds in a ‘muddle through’ scenario such as our base case. And any potential downside could be limited. However, the margin of outperformance over bonds is unlikely to be substantial at current equity valuations. Moreover, the risk cases that we consider most plausible are more unfriendly to stocks than to bonds. We recommend an underweight allocation until those risks recede or are better reflected in equity valuations.

The chart below, supplied by Barclays, shows the current price-to-earnings ratio for both US and global stocks, excluding the energy sector.

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