Barclays turns positive on EU quality after valuation reset

Investing.com -- Barclays (LON:BARC) has turned positive on the European Quality factor, citing improved valuations, reduced crowding, and its defensive tilt amid ongoing macro uncertainties.

Quality in Europe has lagged significantly this year, underperforming by around 4% versus the market, driven mainly by a valuation de-rating and rotation in value stocks, rather than deteriorating fundamentals, Barclays said.

“Valuation now looks more compelling, with Quality trading the cheapest since 2018. RSI is depressed, crowding is low and our news sentiment is grinding higher,” strategists led by Emmanuel Makonga wrote in a Thursday note.

They argue this setup could support a rebound, particularly if markets rotate into cyclical and export-oriented laggards or risks of a potential soft patch materialize.

Barclays acknowledges that Quality’s recent underperformance reflects an unwinding of recession fears and a rotation away from defensives.

The sector tilt—dominated by Tech, Healthcare, and Consumer Discretionary—has also weighed on returns, while the stronger euro and ongoing tariff concerns have pressured earnings revisions for exporters.

Still, the long-term trend remains intact. Strategists highlight that the Quality factor has outperformed over multiple years, and the current weakness appears to be a pullback rather than a structural shift.

“The factor appears attractive, with technicals like RSI still depressed and only just beginning to recover from oversold levels,” the team noted.

“If earnings season were to be better than expected or FX headwinds ease, Quality could regain lost ground,” it added.

Barclays sees the current setup as an opportunity, noting that sentiment indicators are turning more constructive. The bank believes that easing U.S.–EU trade tensions or a potential soft patch in growth could further bolster the appeal of the Quality factor.

Meanwhile, the Momentum factor has outperformed heading into the summer, but elevated crowding and positioning make it vulnerable to a reversal, especially if tariff risks fade or the euro weakens. Strategists see Quality as a balanced alternative.

They also maintain a Positive view on Small Caps, Neutral on Growth, Value, and Low Vol, and Negative on Yield, citing stretched setups and limited macro support.