Schroders House View

The rally in risk assets is likely to continue over the summer due to a combination of high levels of liquidity and a better tone to the macro data. However, after the bounce in activity created by the inventory cycle, we continue to believe that markets will pause in an environment where final demand is found to be lacking and corporate earnings remain under pressure.

Against this backdrop, our positioning in risk continues to be mainly via credit, both investment grade and high yield, where spreads, although retreating remain close to historically wide levels. We also have a long position in commodities and emerging market currencies. On balance, we have a neutral exposure to equities, as a small short position is offset through our long positions in the high beta Pacific ex Japan and emerging markets. Following the sell off, government bond yields are beginning to look attractive again, so we have added duration. Elsewhere, we now have a less pessimistic outlook on the UK commercial property market, where prices appear to be close to finding a floor.

When the new trades are added to our existing positions, the net result is that the Global Asset Allocation Committee increased portfolio risk this month, with the reflation trades outweighing the more defensive positions.