European steel stocks have lost almost half their value this year, according to the brokerage.
Barclays said sharp production cuts, reasonable starting inventory levels and stabilizing raw material prices will help the steelmakers recoup the losses, and named Kloeckner & Co SE, ThyssenKrupp AG and Voestalpine AG as its top picks.
Barclays started coverage of ArcelorMittal with an "equal weight" rating and said the balance sheet of the world's largest steelmaker could still raise concerns among investors if the macro environment worsened in the near term.
In addition, ArcelorMittal's exposure to ordinary steels may put it at a relative disadvantage versus steelmakers with a greater focus on less volatile, higher grade and more consumption-driven materials, the brokerage said.
Barclays initiated Kloeckner, ThyssenKrupp and Voestalpine with an "overweight" rating and said the steelmakers would benefit from their exposure to less volatile and higher grade steels and captive markets.
The brokerage also started Sweden's SSAB AB with an "underweight" rating citing the stock's recent outperformance versus its peers.
Barclays, however, cautioned that a further decline in the macro-economic conditions, particularly in Europe, and weaker-than-expected production were the main risks to its positive view on the sector.
