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Our multi-asset investment views - April 2023

We have downgraded our view on equities as the likely fall in earnings, based on our expectations of a slowdown, is not reflected in current share prices.

28/04/2023
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Multi-Asset Investments

🟢 Long / positive

🟡 Neutral

🔴 Short / negative

🔼 Up from last month

🔽 Down from last month

Main Asset Classes

🔴🔽 Equities

Negative as we believe that the likely fall in earnings, based on our expectations of a slowdown, is not reflected in current prices.

🟢 Government bonds

Positive as signs of inflation peaking, labour markets starting to soften and growth slowing all suggest we are close to the peak in interest rates.

🟡 Commodities

Neutral as supply dynamics and inventory levels remain stable, creating a balanced outlook across commodities.

🟡 Credit

Neutral overall as cyclical indicators still point to a slowdown and valuations on offer are not sufficiently attractive.

Equities


🔴🔽 US

Given current valuations, we prefer to maintain a cautious stance on US equities as we expect to see further signs of a slowdown in the economy.

🔽 UK

The persistent tightness of the labour market, high levels of inflation and high interest rates are all likely to weigh on UK equity prices.

🔽 Europe

Tight labour markets and rising rates create a risk for corporate margins (the ratio of profit to revenue) that will weigh on prices.

🔽 Japan

Our cyclical models suggest that we are entering a ‘slowdown’ phase of the economic cycle. This poses a challenge for the market given its cyclical nature.

Global Emerging Markets1

We remain neutral as the combination of persistent inflation in the US and a global slowdown will limit opportunities for the asset class.

🟢 Asia ex-Japan, China

Economic activity has broadly improved, with early indications from high frequency data and PMI surveys suggesting service sector activity has rebounded strongly.

🔴🔽 EM Asia ex China

Given our expectation of a global economic slowdown, markets such as Taiwan and South Korea may struggle as they are highly dependent on the technology sector.

Government bonds

🟢 US

After the volatility in the banking sector in March, US rate expectations have been cut as the Federal Reserve (Fed) looks poised to raise rates by less than previously expected.


🟡 UK

Recent comments from the Bank of England point to a more balanced tone, and signal that the peak in interest rates could be in sight. Although inflation risks persist, gilts are trading at reasonable levels, meaning we prefer to maintain a neutral stance.

🟡 Germany

Despite support for higher interest rates from the European Central Bank (ECB) pushing bund yields higher, economic growth remains positive.

🟡 Japan

Japan is still battling high inflation and absolute yields remain unattractive in comparison to other markets.

🟡 US inflation linked bonds

We prefer to take exposure through nominal bonds as we expect inflation to fall.

🟡 Emerging markets local currency bonds

Given that any deterioration in sentiment tends to be negative for emerging market assets, we have retained our neutral stance.

 

Investment grade credit

🟡 US

With tightening financial conditions and a global slowdown, investment grade bonds should be insulated by high cash balances and better market access. However, after recent events in the banking sector, we prefer to stay cautious for now.

🟡 Europe

We are monitoring opportunities to re-enter as European bonds are more attractively valued than elsewhere. However, given the current uncertainty, we remain neutral.

🟡 Emerging markets USD

We remain neutral as some of the world’s poorest countries are facing a debt crisis that leaves emerging market sovereigns particularly vulnerable.

High yield bonds (non-investment grade)

🟡 US

We have kept a neutral stance as we would like to avoid this part of the credit market, which tends to be more exposed to a tightening in financial conditions.

🟡 Europe

Valuations, credit quality and yields are slightly more attractive than other regions, but given where we are in the economic cycle, we prefer to remain neutral.

 

Commodities

🟡 Energy

The medium-term outlook for oil markets remains balanced. While we anticipate a material uptick in Chinese jet fuel demand, Russian supply remains resilient. We also expect a deterioration in demand elsewhere as growth weakens in developed markets.

🔼 Gold

We upgrade our view to positive as weakening economic growth, signs of a peak in interest rates and a softer dollar should enable the current rally to continue.

🟡 Industrial metals

The combination of a cyclical slowdown in developed markets and moderating activity in China’s construction sector (amidst slightly tighter supply) leaves us neutral.


🟡 Agriculture

As we enter the planting season, the supply picture is robust and input costs are substantially lower than in 2022. We, therefore, believe any upside potential in prices from here is limited and so retain a neutral view.

Currencies

🔽 US $

We have tactically downgraded, re-establishing our negative view on the dollar. We believe the Fed is more likely to pause monetary tightening before the ECB as US inflation data has started to fall and the European labour market is tighter.

🟢🔼  UK £

We have upgraded our view to positive. The pound should benefit from stronger growth and stickier inflation compared to the US, and therefore has more room to surprise on the upside.

🔼 EU €

We upgraded to positive for similar reasons noted above for the UK. In addition, we expect interest rate differentials relative to the dollar to narrow.

🟡 CNH ¥

We remain neutral on account of the trade cycle dynamics. The carry on offer (the return obtained from investing in assets in one currency versus the cost of borrowing in another currency) is not looking particularly attractive, so we remain on the side-lines.

🟡 JPY ¥

As the narrative moves from inflation to slowing growth, the yen could be viewed as a safe haven. However, we remain cautious while we await any change in Bank of Japan policy.


🟡 Swiss franc ₣

Like the yen, the Swiss Franc is often considered a safe haven and the Swiss National Bank is expected to continue raising rates. However, we remain neutral for now as we prefer the euro and pound relative to the dollar.

 

Global Emerging Markets includes Central and Eastern Europe, Latin America and Asia.

Source: Schroders, April 2023. 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 the US dollar, apart from the US dollar which is relative to a trade-weighted basket.

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Read full reportOur multi-asset investment views - April 2023
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