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Our multi-asset investment views - February 2024

We have upgraded our view on equities to positive as growth continues to surprise to the upside. Find out more about our views on a range of asset classes here.

21/02/2024

Authors

Multi-Asset Investments

🟢 Long / positive

🟡 Neutral

🔴 Short / negative

🔼 Up from last month

🔽 Down from last month

Main Asset Classes

🟢🔼Equities

We have upgraded to positive on equities as growth continues to surprise to the upside. We have implemented this view via global equities to take advantage of cheaper valuations and growth opportunities outside of the US.

🟡 Government bonds

We remain neutral. Although valuations have become more attractive as markets reprice rate expectations, we prefer to tread cautiously as a hard landing resulting from resilient growth and thus higher rates remains a risk factor.

🟡 Commodities

Supply continues to meet demand in commodity markets, despite geopolitical tensions in the Middle East. We therefore remain neutral but maintain our positive outlook on gold, which should benefit from lower real rates.

🟡Credit

We remain neutral on credit. Valuations are extremely stretched, but supportive supply and demand dynamics allied with strong fundamentals keep us neutral.

Equities

🟢🔼US

We have upgraded our view to positive as the US labour market remains buoyant, consumer confidence continues to grow, and core inflation is in line with the Federal Reserve’s (Fed) target.

🟡UK

We remain neutral on the UK as although inflation has eased it is still above the Bank of England’s (BoE) target, and the growth outlook remains weak.

🟢🔼Europe

We have moved to positive on Europe, which has been moving through its own cycle and where manufacturing data is showing signs of recovering from its 2023 lows.

🟢🔼Japan

We have upgraded our view on Japan to positive given a solid fundamental picture, including strong upward earnings revisions. Despite valuations approaching the highs achieved in 1989, valuations today are far less stretched.

🟡 Global Emerging Markets1

We remain neutral as, despite signs of a manufacturing recovery, we expect this recovery to be uneven. This is coupled with a weak outlook on China.

🟡 Asia ex-Japan: China

In China, the growth outlook remains weak, due to a fragile property sector and a lack of meaningful stimulus from the People’s Bank of China. We retain our neutral view given that valuations are relatively cheap and in case of an uptick in the global goods cycle.

🟢🔼EM Asia ex China

We are positive on Taiwan and Korea as they should be the first to benefit from any manufacturing recovery and increase in AI and semi-conductor demand.

1Global Emerging Markets includes Central and Eastern Europe, Latin America, and Asia.

Government bonds

🟡 US

While investors have scaled back their expectations of when the Fed will start to cut rates, we prefer to remain neutral as the improvement in valuations is not yet sufficient to offset the negative carry.

🟡 UK

We remain neutral as although the UK labour market has loosened, and we recognise that valuations are more attractive given less aggressive rate expectations, elevated wages and expectations of tax cuts remain concerns.

🟡 Germany

Despite a fall in inflation, wage pressures remain elevated. Bunds could act as a hedge against a volatile 2024 in the eurozone, but for now we prefer to stay neutral.

🟡 Japan

We remain neutral. Inflation appears to be in line with the Bank of Japan’s target and we await more clarity on any exit from their negative interest rate policy.

🟢 US inflation linked bonds

We remain positive as these bonds offer a hedge against the risk of an uptick in inflation at the end of the year when favourable base effects subside.

🟡 Emerging markets local currency bonds

A soft landing should be supportive of a weaker US dollar and thus EM rates. However, given resilient US data and the risk of a hard landing, we prefer to remain neutral for now.

Investment grade credit

🟡 US

We maintain our neutral stance as valuations are extremely rich and US IG is struggling to compete with cash. However, we acknowledge that issuance is still being met with strong demand as investors seek long-term quality yield.

🟡 Europe

Valuations for European IG are relatively fair. Although we recognise solid fundamentals such as a consistent level of quality in the index and reasonable interest coverage of companies, we prefer to remain neutral.

🟡 Emerging markets USD

There is large variation in spreads across EM sovereigns but attractive valuations. Corporates show less variation in spreads but unattractive valuations. We remain neutral.

High yield bonds (non-investment grade)

🟡US

We remain neutral as US high yield valuations remain extremely stretched.

🟡 Europe

The ECB’s dovish comments triggered a strong rally in EU HY. Remaining value is concentrated in distressed issuers meaning we stay neutral.

Commodities

🟡  Energy

We remain neutral as despite geopolitical events in the Middle East, OPEC+ cuts to supply have yet to materialise. We expect solid supply growth from non-OPEC countries in 2024.

🟢 Gold

We remain positive on gold as we expect some normalisation in real rates later this year. It also provides an attractive hedge versus an uptick in inflation. Prices are also supported by buoyant Chinese domestic demand.

🟡 Industrial metals

Supply continues to remain tight with further downgrades to copper production this year. However, resilient Chinese demand driven by property completion and renewables is likely to subside, while an increase in LME stocks illustrates weak ex-China demand.


🟡Agriculture

Grains have trended lower following increases in yield expectations, while softs and livestock have rallied as adverse weather conditions constrain supply. Therefore, we are staying on the sidelines.

Currencies

🟢US $

We remain positive on the US dollar as a positive carry hedge against the risk that the Fed is not able to cut rates as quickly or by as much as the market is expecting.

🟢UK £

We remain positive on sterling. Despite recent falls, inflation is still above the BoE’s 2% target, a global soft landing should be supportive of more cyclical currencies such as the pound.

🟡 EU €

In Europe, manufacturing data has bounced off its summer lows, and it appears the worst stages of the economic cycle may be behind us. However, for now, we remain neutral.

🟡 CNH ¥

We remain neutral given the weak economic growth outlook. However, we recognise the risk of potential CNY outperformance in the event of a larger pick-up in the global goods cycle.

🟡 JPY ¥

We remain neutral as the Bank of Japan is yet to confirm the exit of their policy of yield curve control and there is currently no other domestic catalyst to support appreciation of the yen.

🔴Swiss franc ₣

Inflation continues to be below the Swiss National Bank’s (SNB) 2% target, suggesting a rate cut is still a possibility.


Source: Schroders, February 2024. 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.

Authors

Multi-Asset Investments

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