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Equity risk exposure should be scaled back to a “mild underweight” from a previous “overweight” position going into the second quarter, Barclays Plc recommended.

“The most important risks on both sides -- sharply higher inflation and much tighter monetary policy, an economic recession, an economically costly ‘trade war’ or geopolitical event, and costly regulatory pushbacks in systemically significant industries like tech -- all pose larger threats to equities than to bond markets,” Barclays head of macro research Ajay Rajadhyaksha and emerging-market strategist Michael Gavin wrote in a note Tuesday. They’re taking “a more cautious stance” for asset markets in the second quarter, they said.

Expected event risks in the second quarter are unlikely to be economically disruptive, they said, though they anticipate the market being rattled occasionally by headlines in ways it wasn’t last year.

Equity valuations “are supported very significantly by extraordinarily permissive monetary conditions that are feasible only because of the muted inflationary backdrop,” the report said. Valuations could be pressured if investors began to fear a shift in the inflationary and monetary outlook -- and they don’t currently provide much of a cushion against a global trade war if one were to break out, Rajadhyaksha and Gavin wrote.

One example of how markets have realigned in favor of fixed-income is that, “at 2.85 percent, the U.S. 10-year bond is now nearly 100bp higher than the dividend yield on the S&P 500, compared with 25bp in mid-2017 and -50bp in mid-2016,” according to the note.

“Given the imminence of trade policy announcements (the U.S. will announce details on China tariffs in a few weeks), and the fact that it is less expensive to lurk in bond markets than it was three months ago, we recommend a tactical retreat out of some equity holdings into fixed-income,” they wrote, “positioning to reload if the market overreacts to economic or policy news.”

Other calls made in the Barclays report:

* Wait for clarity on trade policy before picking sides within global equities

* They no longer expect further compression between U.S. high-yield and investment-grade credit

* The next move in oil prices will be to the downside, “though not immediately”

* In emerging markets, favor sovereigns over corporate credit -- Argentina, Egypt and South Africa in particular

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