European Markets Rebound in November Amid Style and Sector Shifts

European markets made a recovery in November after initial selloffs following the US elections. However, with the exception of Momentum, factor performance remained subdued.

Momentum Style Faces Headwinds

Barclays strategists, led by Matthew Joyce, maintained a Neutral stance on Momentum in November, despite its strong post-election performance. This cautious approach stems from expectations of rising headwinds:

• US Yield Dynamics: Year-over-year changes in US yields have turned positive, historically challenging for Momentum performance.
• Rates Volatility: Anticipation of a Trump victory and Republican sweep raised concerns about volatility in interest rates, prompting a pre-election downgrade of Momentum to Neutral.

While Momentum has shown resilience post-election, cracks are starting to appear, prompting Barclays to sustain its cautious stance.

Cyclical Sectors and Optimism for 2025

Barclays sees improving macroeconomic indicators and supportive policies as a reason for optimism:

• ISM Strength: A rise in the ISM index, with internal metrics like New Orders, Prices Paid, and Employment contributing to positive signals.
• Labor Market Recovery: A rebound in the US labor market following disruptions from strikes and adverse weather supports this outlook.
• Policy Environment: Reflationary US government policies and a continued global rate-cutting cycle create favorable conditions for economic growth.

Looking ahead, Barclays expects the economic cycle to extend into 2025, favoring cyclical over defensive plays.

Shift from Defensive to Cyclical Styles

Historically, the year following US elections witnesses a transition from defensive to cyclical sectors. Barclays strategists have aligned their strategies with this trend:

• Cyclical Value: Upgraded from Negative to Positive in recent months, signaling confidence in economic recovery.
• Small Caps: Maintained a Positive view, reflecting optimism in smaller, growth-oriented companies.
• Low Volatility Stocks: Retain a Negative outlook on defensive, low-risk equities, as these tend to underperform in an expanding economic cycle.

As the macroeconomic backdrop improves and policies remain supportive, Barclays anticipates a favorable setup for growth heading into 2025. Their strategy emphasizes cyclical and value-oriented investments, while staying cautious on Momentum and defensive styles, positioning for extended recovery in the economic and market cycle.