Snapshot - Markets

Our multi-asset investment views for June 2019

This month's asset allocation update includes a number of upgrades in the government bond space, as well as upgrades to the US dollar and Japanese yen.

25.06.2019

Key

Highlights

From a fundamental standpoint, little has changed over the month; markets are supported by ample liquidity, with further dovish signals from the central banks, but cyclical risks remain elevated. There is still little evidence of a recovery in the world outside the US; our cyclical models point to waning momentum and trade tensions remain unresolved.

We continue to like carry strategies because they benefit from low interest rates with more contained levels of cyclical risk, so we maintain our exposure to high yield debt and currency carry. Equity positions are neutral as we await more clarity on the cyclical picture.

What has changed is that our growth hedges have rallied hard, particularly duration. Accordingly, we have taken some profits on our long duration view and have rotated into other defensive positions such as gold, minimum volatility equities and consumer staples.

With the Federal Reserve’s shift in stance, we also see some upside in emerging equities although we are shorting Europe against this position where permitted to ensure that cyclical risk is still controlled.

Asset classes

 
 

Equities

We hold a neutral view as cyclical risks continue to be elevated and unabated trade tensions weigh on markets.

 

Government bonds

The efficacy of bonds as a defensive asset during periods of stress continues to provide a tailwind and with the risks of a stagflationary environment still relatively low, we maintain a positive view.

 

Commodities

We remain neutral on broad commodities given negative momentum and carry but we are positive on gold as a hedge.

 

Credit

Valuations are more attractive from a short-term perspective, presenting an opportunity against a backdrop of global liquidity easing.

 

Equities

 
 

US

Momentum continues to be one of the strongest among major equity markets.

 

Europe

Risk of a weaker US dollar (USD) with dovish Federal Reserve (Fed), resulting in a stronger euro (EUR), may start to raise questions over the recent improvement in earnings outlook.

 

UK

Increasing probability of a ”no-deal Brexit” and weakening investor sentiment present a strong headwind for UK equity market.

 

Japan

We continue to hold a neutral view as export weakness remains an area of concern.

 

Pacific ex-Japan

We remain neutral as export weakness in Singapore continues to be a drag.

 

Emerging markets

Valuations seem attractive with good upside potential although trade wars could pose a threat. EMs with more domestic focus present the most interesting opportunities.

 

Government bonds

 
 
 

US

We upgraded US rates because of the weak cyclical outlook paired with continuous trade war rhetoric between the US and China.

 
 

UK

Upgraded gilts to positive, which could benefit from uncertainty in the UK due to increasing “no-deal Brexit” probability.

 

Germany

We remain positive especially as the European Central Bank is keeping a dovish stance to try to increase growth and raise inflation back to its target.

 
 

Japan

Upgraded to positive given threats to export demand due to trade wars.

 

US inflation linked

We continue to be positive on US break-evens as the recent economic weakness has been already priced in.

 

Emerging markets local

Despite a more stable EM outlook, we remain neutral as valuations have worsened which limits the upside potential on local debt markets.

 

Investment grade (IG) corporate bonds

 
 
 

US

Upgraded US Credit as we believe more attractive valuations and a new liquidity mini-cycle are likely to offset our long-standing structural and fundamental concerns.

 

Europe

We maintain a positive view as fundamentals are strong in Europe and low interest rates provide additional support.

 

Emerging markets USD

Our view remains neutral as valuations are still unattractive.

 

High yield bonds

 
 

US

We remain neutral as valuations are still attractive, but longer term concerns remain over fundamental credit quality.

 

Europe

We continue to hold a positive view as fundamentals are strong and valuations are appealing.

 

Commodities

 
 

Energy

Despite negative momentum following the sell off in May, we maintain a neutral outlook.

 

Gold

We maintain a positive view on gold based on potential for further Q2 growth disappointment, weakening USD and further loosening in monetary policy.

 

Industrial metals

We keep industrial metals at neutral as the sector has sold off amid growth concerns with limited space to move further at this stage.

 

Agriculture

We maintain a negative stance on agriculture as global stock levels look set to remain elevated.

 

Currencies

 
 
 

US dollar

We upgraded the US dollar to positive as its status as a G10 high yielding currency makes it a positive carry hedge against global growth weakness.

 
 

UK sterling

We have downgraded sterling (GBP) to negative due to reduced probability of a Brexit deal and weak economic data.

 

Euro €

Facing mixed medium-term and long-term drivers, we kept EUR as neutral.

 
 

Japanese yen ¥

Global growth weakness is likely to continue and so we have upgraded the yen as it could provide a safe haven in this environment.

 

Swiss franc ₣

We maintain a neutral view, as the weakness of European industry is spreading to Switzerland.