Our multi-asset investment views - October 2019
Looking at the big picture, our cyclical models still point to caution but markets have moved to price some of that risk. Indeed, bond yields have rallied and defensive equity sectors have outperformed. If manufacturing data stabilises or if political concerns on trade or Brexit are alleviated, we could see a recovery in assets sensitive to the economic cycle. We continue to like duration and gold as a hedge against a further deterioration in growth, but we have taken some profits on defensive positions like the Japanese yen. We have also identified some areas where data has stabilised, namely emerging equities and US homebuilders, and are taking advantage of extreme pricing in US small cap stocks and on the US curve. We continue to be “long liquidity” via our exposures to FX carry and US high yield debt.
Looking into 2020, our biggest concern is the potential for earnings disappointment in the US as labour costs, tariffs and elevated expectations could prove to be significant headwinds. This is important because the US has been the leader of this bull market, so signs of cyclical improvement in the rest of the world are necessary to make us more positive on risk assets.
Remain neutral on equities given supportive liquidity conditions. We believe equities are still attractive relative to bonds, but are wary of the significant risk of corporate earnings downgrades.
Valuations have worsened, but strengthening momentum and weak economic indicators mean we keep bonds as defensive positions in portfolios.
Upgraded commodities to positive. Our positive view on gold offsets slight weakness in the cyclical backdrop
The strong technical backdrop remains, given the broadly dovish orientation of US Federal Reserve (Fed), European Central Bank (ECB) and emerging market monetary policy.
Downgraded to neutral as earnings expectations have started to slip again, though slowly. Valuation is moderately expensive but not at an alarming level.
Uncertainties around policy direction (“hard” Brexit is still a risk) continue to pose challenges for UK markets. GBP weakness may provide support given the international nature of UK companies.
2019 earnings forecasts fell sharply and further downgrade risk remains. EUR weakness may provide support.
Despite an improvement in the economic data, export weakness and a strong yen continue to be a drag.
Growth momentum in the region continues to be weak and expectations of further accommodative monetary policies are priced in.
Pressures from trade conflicts continue to raise the risks for those markets with an export focus.
US government bonds play an important role as a hedge against growth disappointment, and offer a higher yield relative to other markets.
Continued political uncertainty within the UK could further support gilts.
We remain neutral as valuations continue to trade at extreme levels, and the ECB is still indicating that it has reached its limits on monetary policy.
There have been no significant developments and therefore our view remains unchanged.
US inflation linked
Turned positive due to the impacts of tariffs and after a lift in shorter term core CPI.
Emerging markets local
Remain at neutral, following last month’s downgrade on significant spread tightening and cyclical risks
We continue to favour the US, given the technical backdrop and dovish Fed.
Maintain at neutral. European investment grade increasingly suffers from negative yields and high levels of supply.
Emerging markets USD
We retain our positive view on EM sovereigns, given the strong technical backdrop and broadly dovish orientation of EM monetary policy.
Despite seeing a slight pick-up in projected default rates, we remain positive, on valuation and technical grounds.
Fundamentals are weak and there is more ‘call risk’ than the market is currently pricing. This is the risk that a bond issuer will redeem its bonds before they mature.
The impact of potential geopolitical tensions offsets the effects of softening economic sentiment.
Amidst concerns of economic growth, gold continues to be supported by the provision of liquidity by central banks.
Price upside continues to be restrained by cyclical headwinds and downside limited by central bank dovishness.
We upgraded to neutral, as prices now largely reflect the lacklustre outlook. Inventory should remain elevated in 2020 and the US-China trade war shows little sign of resolution.
World growth fell again with US data leading the move downwards. On the other hand, expectations for additional rate cuts have pared back more in-line with Fed’s own anticipations.
With the Bank of England continuing to push back against suggestions of future rate cuts, and the probability of a “no deal” Brexit all but priced in, we remain at neutral after upgrading our view in September.
We remain neutral in light of increased stimulus from the ECB, but recognise potential for positive surprises, include ebbing Italian risk owing to a change in government, and increased talk of fiscal stimulus from Germany.
Although our cycle models continue to point to caution, we have downgraded JPY this month to reflect the stabilisation in global macro sentiment, thanks to emerging signs of life in US/China trade talks and increased liquidity support from the Fed.
Swiss franc ₣
Remain neutral on CHF, we believe the intended impact of weakening the currency through cuts will be limited.
Source: Schroders, October 2019. The views for equities, government bonds and commodities are based on return relative to cash in local currency. The views for corporate bonds and high yield are based on credit spreads (i.e. duration-hedged). The views for currencies are relative to US dollar, apart from the US dollar which is relative to a trade-weighted basket.
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