🟢 Long / positive
🔴 Short / negative
🔼 Up from last month
🔽 Down from last month
Main Asset Classes
We have upgraded equities to positive in the absence of recessionary risks in the short-term. We expect the S&P 500 to rally into year-end.
🟡🔽 Government bonds
We have turned neutral on government bonds. Although we expect yields to stabilise, given that we are not expecting an imminent recession or a Federal Reserve (Fed) pivot, we prefer to have exposure to rates via credit.
We are keeping our positive score on commodities as they should provide some upside if the export cycle picks up and also protect our portfolios from inflation and geopolitical risks.
We have upgraded our view as the sell-off in bond markets has resulted in attractive yields in US high yield debt. European investment grade debt still offers better yields than cash.
We upgraded to positive as we believe stabilising bond yields and resilient growth in the US should support this market into year end.
While concerns around stagflation (a combination of slowing growth and accelerating inflation) remain, valuations appear relatively attractive as the UK has underperformed other markets. Better-than-expected fundamentals and a cheap currency have also raised the prospects for the market.
The eurozone purchasing managers’ index (PMI) has continued to decline, with manufacturing activity being particularly weak. Valuations are relatively cheap but high inflation and weak fundamentals lead us to keep a negative view.
Strong corporate fundamentals coupled with good domestic demand should allow Japanese equities to grind higher and outperform other regions.
🟡 Global Emerging Markets1
We remain neutral. The relatively weak global goods cycle remains a headwind; however, the asset class is likely to be supported by central bank policy easing, given inflation in emerging markets (EM) is generally lower than in developed markets.
🟡 Asia ex-Japan, China
On the one hand, valuations appear relatively attractive, but momentum has slowed and doubts over economic growth have increased. The market also faces meaningful challenges in the economically significant property sector meaning we remain neutral.
🟡 EM Asia ex China
There is some evidence to show that the global manufacturing cycle has started to rebound, particularly in the technology sector. This should benefit Taiwan and South Korea where technology exports are a major contributor to GDP.
With the Fed keeping interest rates on hold, we see few catalysts for the short-end of the curve to rally. Longer-dated bonds are unattractive due to the yield curve being inverted (when long-term market interest rates are less than short term ones), and concerns surrounding debt levels and inflation. We have therefore downgraded to neutral.
Whilst wage pressures stay elevated due to ongoing tightness in the labour market, inflation has been falling more than expected. We remain neutral for now.
Lower inflation and a deteriorating growth outlook are favourable for Bunds (Germany government bonds), but until we see further evidence on the direction of the economy, we prefer to stay on the side-lines.
We continue to be neutral on Japanese bonds as absolute yields have remained unattractive.
🟡🔽 US inflation linked bonds
We have downgraded to neutral given the Fed’s commitment to curbing inflation. We also see some tentative signs of the upward trend in wages softening.
🟡 Emerging markets local currency bonds
Amid continued concerns about risks to the asset class should the US dollar strengthen, we have decided to keep a neutral stance.
Investment grade credit
Although corporate fundamentals remain strong in the US, yields look unattractive relative to cash rates and valuations remain expensive.
We retain our preference for European investment grade bonds as we expect it to benefit from the European Central Bank (ECB) nearing the end of its hiking cycle and from the positive carry (carry describes borrowing where interest rates are relatively low to invest in assets where interest rates are relatively high).
🟡 Emerging markets USD
Fundamentals remain resilient despite sluggish Chinese growth. While the light supply of bonds is keeping technical conditions tight, valuations are expensive, and so we remain neutral.
High yield bonds (non-investment grade)
We have upgraded our score to positive. Yields are attractive and we do not expect any pick-up in defaults as corporate and household balance sheets remain strong, leaving them in good stead to digest tightening financial conditions and any moderation in growth.
Defaults in Europe are starting to increase, albeit from a very low base, so we remain neutral.
Supply cuts from Saudi/Russia are still feeding into the market but we believe the impact is largely priced, and the outlook for 2024 is for more muted demand growth. However, energy is diversifying in the context of a tense geopolitical situation.
The pick-up in demand from central banks and Chinese domestic demand is supportive meaning gold could perform well if real (inflation adjusted) yields peak. The negative carry from holding gold means we prefer duration (bonds) for interest rate sensitivity exposure.
🟡 Industrial metals
While supplies of industrial metals remain very tight and the outlook for growth is muted, it is unclear where any increase in demand would come from. We therefore remain neutral.
Crop conditions have improved significantly, providing a buffer on the supply side. El Nino remains a risk but higher yields and good progress in this planting season in the southern hemisphere means we have downgraded our score to neutral.
🟢🔼 US $
A better cyclical outlook in the US relative to other regions leads us to upgrade to positive. Carry and hedging properties of the dollar are also attractive.
🟡 UK £
The poor economic outlook and high levels of inflation still weigh on sterling, but with high levels of carry we remain neutral.
🔴 EU €
Slowing European growth and unattractive interest rate differentials relative to the US dollar lead us to keep our negative score.
🟢🔼 CNH ¥
We have upgraded the renminbi to positive given the lacklustre domestic picture is already priced in and the currency is cheap. Any potential recovery in Chinese exports would bode well for the currency.
🟡 JPY ¥
Signs of inflation increasing in Japan could spark more monetary policy discussions from the Bank of Japan, but while it is unclear whether they will intervene, we remain neutral.
🟡 Swiss franc ₣
Inflation appears to have been brought under control in Switzerland, but we believe the currency is exposed to a weakening euro as the country’s exports significantly depend on European demand.
Source: Schroders, October 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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