Barclays said on Wednesday global mutual funds investors could sell equities worth a further $350 billion this year, unless fears of recession diminish, due to an uncertain macro backdrop and monetary policy tightening.
Investors have been selling equities in the wake of rising inflation, prompting economies to hike interest rates. Russia's invasion of Ukraine added to the inflationary pressures amid a surge in energy and commodity prices, increasing costs to companies as it hurt their valuations along with volatility in global financial markets.
Barclays said equity outflows amounted to an average of 2.6% of mutual funds' assets under management (AUM) in previous periods of major stock sell offs, such as the Great Financial Crisis of 2008-09, compared to 0.3% this year, which implies another $350 billion of equity sell-off is forthcoming this year unless recession fears diminish.
Mutual funds investors have been net sellers of equities this month, for the first time since August 2020, though equity outflows are tiny compared to the record $1.3 trillion inflows since 2020, Barclays said.
"Both economic momentum and EPS revisions momentum have turned negative, which suggests the direction of travel is likely towards more (equity) outflows, although the magnitude is unclear at this stage," the brokerage added.
Barclays believes the consumer outlook is unlikely to get any better if the US Federal Reserve gets more aggressive on monetary policy, even though income and business fundamentals look supportive for now.
Nerves about a global recession were jangled on Tuesday by weak US housing market data and the U.S. Federal Reserve has vowed to act aggressively by hiking the cost of borrowing and minutes from its most recent meeting, which is due later.
The brokerage continues to see the US to be more vulnerable to further equity selling than the European Union, given higher valuations.