Investors should start taking on measured risk, particularly in areas such as energy and healthcare, as prospects for the U.S. economy have improved and a meltdown related to Europe’s sovereign debt crisis appears to be off the table for now, according to Barclays Capital.

It may be a propitious time for investors to “dip their toes in the water,” and they should favor assets that have solid yields and low leverage, Barclays said in its latest quarterly outlook. But, because the situation in Europe is still fragile, investors should maintain minimal exposure to the euro and the European Union., it said.

While upside potential for risky assets is nowhere near what it was in March 2009, when markets bottomed and valuations were at their lowest, Barclays nonetheless reckons that a double-dip recession in the United States and a worst-case scenario in Europe will both be avoided. That means the current environment allows investors the breathing room to take on more risk.

“Risks have become so pronounced that investors have taken very cautious positions, suggesting that any further reduction in these risks should produce more than the usual upside response in risky asset prices,” Barclays’ head of research Larry Kantor said in the report.

However, Barclays said any upside move in asset prices will not be smooth sailing.

The U.S. is afflicted with political and regulatory uncertainties while “the solution to the euro area debt crisis will be bumpy and difficult,” Kantor said.

Other factors that could cause future market turmoil include bank deleveraging, political tensions in both the Middle East and North Africa, heavy fiscal deficits in developed economies, as well as inflation and slower growth in the developing world, Barclays said.

Barclays is the bank behind the iPath family of ETN and it developed the world’s-biggest ETF company, iShares, before selling it to BlackRock.

Growth Will Come Slowly

For the U.S. equities markets, Barclays is calling for a particularly challenging first quarter, followed by modest rallies thereafter.

Sectors like technology, energy and healthcare look best, while materials, financials, utilities and staples look less prospective.

Similarly, European equities have only a modest upside potential at this point, and quality low-beta portfolios are “preferred.”

What’s more, Europe’s ongoing crisis should remain the driver for bond rates, spreads and volatility across the globe.

“While we see signs of a sustainable framework being put in place in Europe, this does not imply a sharp risk-on bias due to the waning of stimulus measures, low inflation risk and the prospect of fiscal tightening,” Barclays said about the outlook for bonds. “We expect rates to remain range-bound in Q1.”

Emerging markets should continue to see inflows, thanks to attractive valuations and easing risk aversion, though growth is slowing in many regions of the developing world, Barclays said.

Those economies least tied to eurozone pressures are the safer bet. Such investment venues include Malaysia, Korea, Brazil, Mexico and South Africa, where “yields are high, curves are steep and countercyclical monetary policy will not trigger FX depreciation,” the report added.

Platinum And Palladium Scarce

Strong fundamentals should support a rally in commodities if investors’ business confidence improves, the report said.

Even as uncertainties surrounding China and the role of European banks in the financing of trade and inventories cast shadows over markets, overall low inventories and/or spare capacity should keep the markets in a better position to withstand any growth shock than they were in 2008.

“This is not the time to short commodities as an asset class, especially since key markets such as grains and oil are highly vulnerable to weather and geopolitical risks,” the report said.

Favoring copper, platinum and palladium, crude oil as well as corn and gold, Barclays noted that platinum and palladium supplies are the most constrained of all commodities right now. It noted that output of the two metals is projected to drop for the first time since 2009.