FOREWORD
We have been advising investors to re-engage in the stock and corporate bond markets
since the March issue of the Global Outlook (“Green shoots have arrived”). The markets
have come a long way since then, and the question now is whether it is time to reduce
exposure. Our answer at this time is “not quite yet”.
It is true that valuations are no longer compelling. Stocks seem roughly fairly valued, and
corporate bonds may even have overshot somewhat, at least in some sectors. However, we
believe that a combination of surprisingly strong economic news and policy settings still at
“crisis” levels is a potent brew that will keep driving risky asset prices higher. While
economic recovery is now generally priced into markets, investors appear to be discounting
an unusually weak recovery in countries such as the US that have lagged the global
recovery. Yet the US is exhibiting all the characteristics of a classic, V-shaped economic
recovery – just as we have seen in most of Asia – that is typical following a severe recession.
In our view, the main risk to the current bull market in stocks and corporate bonds is not
that the global economic recovery will falter. Rather, we believe that it is the strength of the
recovery itself – or at least the recognition of it – that provides the greatest source of risk to
the continuation of the market rally. Once investors embrace that a “normal” recovery has
arrived, they will quickly conclude that the current “crisis” settings for policy – such as nearzero
interest rates – are no longer appropriate. That – along with the impending withdrawal
from direct purchases of duration by central banks – will drive interest rates higher and
make it much more difficult for stock and corporate bond prices to keep rising. In other
words, the good news that the patient has recovered will shift toward the more sobering
news that the bill has come due. That recognition – which is likely to be fostered by still
more positive surprises on the economic data front, especially in the US – will be the signal
to reduce exposure, and it could well come before the end of the year.
As in every quarter, we have tried to pull together the best ideas from our economists and
strategists across every region in the world covering every asset class to generate a global,
integrated view of economic and financial market trends. We sincerely hope that you, our
clients, find the material herein a valuable guide to making informed investment decisions.
Larry Kantor
Head of Research
Barclays Capital

SUMMARY OF ASSET ALLOCATION THEMES
KEY FORECASTS KEY RECOMMENDATIONS
Equities 􀂄 Global equity markets trade close to fair value on
undemanding earnings estimates.
􀂄 Both the growth and profit outlooks are likely to prove
considerably stronger than currently priced into markets.
􀂄 The US profit outlook is particularly favourable due to
the impact of falling unit labour costs on profit margins.
The outlook for US industrials is notably positive due to
declines in natural gas prices.
􀂄 Our baseline forecast of strong global growth
accompanied by very easy policy settings is amenable
to a temporary rise in valuations.
􀂄 We would tend to rotate towards the US equity market,
where growth is accelerating fast, away from Asia
where the recovery is settling into a more sustainable
rate of growth.
􀂄 As in 1993, the combination of strong growth and low
rates may induce a pickup in investor flows to emerging
markets. Brazil and perhaps Mexico seem best placed
to benefit.
􀂄 Our top sector is industrials, particularly US industrials.
Thereafter, we favour energy (green as well as
orthodox) and technology (US). We prefer Energy over
materials for the time being.
Bonds 􀂄 The focus is turning to exit strategies from QE, and the
timing of rate hikes in 2010-11. While official hikes are
some distance away (except for the Bank of England),
the market will increasingly price in some normalization
everywhere.
􀂄 Rates are at the bottom end of their trading range:
rising rate hike expectations and less favourable
supply/demand post-QE are two big negatives. Large
moves are likely in Q1-Q2 10, but might come earlier.
􀂄 While the sub-6m part of the curves will remain anchored
at a low level by abundant liquidity, short-end rates
everywhere are looking too rich: we are short 1y1y fwd or
2y in all the majors.
􀂄 Euro area long rates still provide best value: no QE
premium and more visibility on the ECB than on the Fed
and BoE. Be small long 10y Bunds and 5y5y fwd euro
rates versus US.
􀂄 Be long 10s vs the wings in UK and EUR, and favor 5s
versus the wings in the US.
Commodities 􀂄 The price recovery in commodities still looks modest
relative to previous cycles.
􀂄 A slowdown in China’s import demand is the major
threat to a continuation of the recovery, with industrial
metals and some agricultural markets most at risk.
􀂄 A cyclical rebound in OECD economies should take up
some of the slack and we expect a period of further,
though more modest, gains in benchmark commodity
indices over the rest of 2009.
􀂄 Long crude oil as global demand recovery is reducing
inventories, with OPEC maintaining supply discipline.
􀂄 Long copper and nickel, which should be among the main
beneficiaries of a cyclical OECD recovery.
􀂄 Long gold, as macroeconomic environment, especially
more USD weakness, should encourage strong
investment interest and offset the weak jewellery sector.
􀂄 Long corn and cocoa, as poor weather is reducing harvest
projections and demand is firming.
Inflation 􀂄 Inflation breakevens offer value, but real yields likely to
rise if nominals suffer from ongoing economic recovery.
􀂄 We recommend holding sub 10y UK linkers and US TIPS
versus nominal Treasuries.
Credit 􀂄 We expect spreads to tighten further due to strongerthan-
consensus growth and supportive policy.
􀂄 Our preferred strategy is to stay long credit, while being
watchful for signals that would lead us to trim
exposure.
􀂄 Some key systemic and idiosyncratic concerns are
shifts in asset allocation, interest rate changes, new
issue and event risk.
􀂄 Within investment grade, A/AA rated industrials have
somewhat limited room to rally and could face
headwinds from relative value considerations. We
would look to add exposure to BBB industrials and
wide-spread financials.
􀂄 The high yield and leveraged loan markets offer value,
but on a more selective basis.
Emerging
Markets
􀂄 We see a generalized improvement in the outlook that
spans regions and will continue to win over skeptics.
􀂄 Monetary easing is largely behind us, and tightening
should begin in Q4 (India), gather pace in Q1 (Mexico
and Korea) and become generalized in Q2.
􀂄 Stunning rally leaves HG credit fairly valued: we see
little room for outperformance, though opportunities
remain in selected high yielders.
􀂄 Recovery of EM FX has lagged credits and implied vols are
still high, in our view. Position selectively for FX strength
and declining vol.
Foreign
Exchange
􀂄 USD is at risk of overshooting to downside if the Fed
does not soon start to take back liquidity.
􀂄 BoE has the most potential to surprise the market by
tightening policy.
􀂄 Liquidity surplus will benefit the smaller currencies at
the expense of G3.
􀂄 FX vol curve is too steep.
􀂄 Buy low delta EUR call/USD put for year-end surge.
􀂄 Long GBP against both USD and EUR.
􀂄 Buy commodity currency basket against USD, EUR, JPY.
􀂄 Buy vol flattener.
Barclays Capital | Global Outlook
24 September 2009 3
CONTENTS
OVERVIEW 4
Still in the sweet spot
The combination of strong cyclical growth and “crisis-level” policy settings remains
favorable for risky assets. However, investors should be alert to signs of policy unwind.
ASSET ALLOCATION 9
Easy money
We advise reducing bond exposure in favour of a cash-equity barbell.
ECONOMIC OUTLOOK 19
Sweet spot for growth
A strong global recovery is underway. In the coming quarters, we expect above-trend
growth in the US, Germany and LatAm.
COMMODITIES OUTLOOK 33
Passing the baton
China’s import demand for some commodities is easing. The potential for a strong cyclical
rebound in OECD economies is likely to help offset this.
FOREIGN EXCHANGE OUTLOOK 41
The dollar river flows downhill
The USD will likely fall further in the coming quarter, driven by excess liquidity and unattractive
USD asset markets.
INTEREST RATES OUTLOOK 45
Moving toward higher yields in 2010
Risks of a back-up in rates are rising, as the focus definitely turns toward central banks’ exit
strategies and rate hikes in 2010-11.
CREDIT MARKET OUTLOOK 54
Stay long but watchful
We expect spreads to tighten further due to stronger-than-consensus growth and
supportive policy, but we are watching for signals that would lead us to trim exposure.
US EQUITY MARKET OUTLOOK 62
Equities are more leveraged to the economic recovery than credit
We recommend staying overweight industrials and technology, which we expect to benefit
from cyclical and secular forces.
EMERGING MARKETS OUTLOOK 67
The wall of worry meets the wall of money
We think that investors’ fear and financial flows will continue to support emerging markets
in the months to come.