🟢 Long / positive
🔴 Short / negative
🔼 Up from last month
🔽 Down from last month
Main Asset Classes
🟡 🔼 Equities
The latest bear market rally seems to have ended but the apparent peak in interest rates leads us to a neutral stance.
🟢 🔼 Government bonds
An imminent economic slowdown should provide support for yields, which are now trading at more realistic levels.
China’s reopening should be positive yet improving supply dynamics and an impending economic slowdown may offset this.
We favour investment grade over high yield given recessionary fears, preferring Europe and EM over the US on valuation grounds.
We see no catalyst for the recent rally continuing. While the US economy is proving remarkably resilient, we have strong doubts that current valuation levels are justified.
Domestic issues are aplenty but we’re remaining neutral on valuation grounds and projected weakness in sterling.
🟢 🔼 Europe
Valuations are appealing, corporate balance sheets are strong, and China’s reopening should provide a boost, with a near-term crunch in energy supply averted so far.
🟡 🔼 Japan
Upgraded as the region should gain a boost with China’s reopening accompanied by attractive valuations. However, projected yen strength may prove a headwind.
🟢 🔼 Global Emerging Markets1
Recessionary risks are traditionally not supportive for emerging markets. Yet current valuations reflect this, and China’s re-opening should help. A stable, and perhaps weaker, dollar would likely provide further support.
🟢 🔼 Asia ex-Japan, China
China’s reopening has been far quicker than most expected, and valuations have cheapened markedly.
🟡 EM Asia ex China
The region should get a boost from the Chinese reopening, but a global downturn may prove challenging for markets such as Taiwan and Korea.
🟢 🔼 US
The recent repricing has brought Treasuries back to fair value, and market concerns have now moved to slowing growth and away from risks of higher inflation.
Persistently high inflation, a cost-of-living crisis and a weakening domestic housing market are all weighing on the UK economy. We have doubts as to how far the Bank of England (BoE) can raise rates to control inflation, leaving us neutral.
While the European Central Bank (ECB) rhetoric turned noticeably hawkish, bund yields have moved to reflect this. Monetary policymakers are often described as hawkish when expressing concerns about limiting inflation.
The Bank of Japan(BoJ) has (finally) turned slightly hawkish, and further policy changes in yield curve control (YCC) operations are expected. Absolute yields are, nevertheless, still unattractive compared to other markets. YCC is one method by which a central bank can control longer-term interest rates, by buying and selling bonds to hit the rate target.
🟡 US inflation linked bonds
The recent fall has moved inflation linked bonds towards fair value, with US 10-year real rates now at 1.25%.
🟢 Emerging markets local currency bonds
The recent rally has lessened the sector’s appeal but current real yields versus developed markets present selective opportunities.
Investment grade credit
Our long-term view remains reasonably positive but more attractive credit spreads can be found in Europe. The credit spread is the margin that a company issuing a bond has to pay an investor in excess of yields on government bonds and is a measure of how risky the market perceives the borrower to be.
European investment grade (IG) credit spreads are close to levels last seen during the Covid outbreak and appear to have priced in too much bad news.
🟢 Emerging markets USD
We remain positive as emerging market fundamentals are looking relatively strong, and the region has priced in the recent rise in geopolitical tension.
High yield bonds (non-investment grade)
The relative size of the US loans market make the sector vulnerable in the event of a sharp downturn in the US economy.
In comparison to the US, European high yield (HY) credit is more attractively valued, while also exhibiting superior quality.
Risks remain balanced. While natural gas prices have plummeted due to a mild winter, we should remember weather can be notoriously fickle, and Europe continues to have a longer-term problem with supply. Meanwhile, a Chinese reopening should prove positive, yet a wider global economic downturn should be negative.
The relationship between US real yields and gold appears to have broken down and, perhaps surprisingly, gold has fallen since the start of the Russia/Ukraine war. Given our uncertainty on the path for the US dollar, we remain neutral.
🟡 Industrial metals
We remain neutral, pulled in one direction by China’s reopening and the other by a wider economic downturn. Immediate spare capacity remains scarce although there appears to be supply coming online for copper in 2023.
Sentiment amongst US producers has rebounded strongly, and fertiliser prices have notably fallen. Demand remains robust yet supply is on course to meet it.
🔴 🔽 US $
We believe the US dollar has peaked and the divergence in global central bank policy should put pressure on the currency to weaken. We therefore downgrade our score.
🔴 UK £
The deteriorating economic outlook and worsening stagflationary environment, coupled with domestic instability have weighed on the currency. We have doubts the BoE can raise rates as far as markets suggest given the economic outlook.
🟡 EU €
While the outlook for growth is not positive, we believe that current extreme levels of negative sentiment and ECB hawkishness mean there is an opportunity for a tactical rebound in the currency.
🟡 CNH ¥
Although positive moves on a China reopening should benefit the renminbi (offshore), as well as other Asia-focused currencies, we remain neutral.
🟢 🔼 JPY ¥
The recent move from the BoJ regarding its YCC operations may be the first of a series of monetary tightening moves, which would be supportive for the currency.
🟡 Swiss franc ₣
The Swiss franc is better shielded from the energy crisis than the rest of Europe. As a result, the Swiss National Bank may not hike rates as aggressively as the ECB or US Federal Reserve, so we remain neutral.
1 Global Emerging Markets includes Central and Eastern Europe, Latin America and Asia.
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