Our multi-asset investment views - July 2023

🟢 Long / positive

🟡 Neutral

🔴 Short / negative

🔼 Up from last month

🔽 Down from last month

Main Asset Classes

🟡 Equities

We remain neutral. Although softening inflation and growth may help equities move higher, valuations have become more expensive.

🟡 Government bonds

We remain neutral as the inverted yield curve (where long-term interest rates fall below short-term interest rates) means government bonds are generating a negative carry.

🟢🔼 Commodities

We have upgraded commodities as we expect supplies to tighten in the energy and agricultural sectors creating upward pressure on prices.

🟢 Credit

We remain positive on credit, with a preference for European investment grade as the level of carry is still attractive.

Equities

🟡 US

We maintain our neutral score. Although growth in the US remains positive and inflation is softening, valuations are expensive relative to bonds and other equity markets.

🔴 UK

We remain negative on the UK due to the high level of interest rates and inflation, where the effects have yet to be fully felt.

🔴 Europe

The continued weak manufacturing backdrop, combined with the European Central Bank’s (ECB) attempt to bring down inflation and limit wage inflation, means we retain our negative view.

🟡 Japan

We remain neutral as corporate governance reforms and escaping deflation create potential tailwinds, despite attractive valuations.

🟡 Global Emerging Markets¹

Whilst many EM central banks have succeeded in controlling inflation, equity market performance is likely to be impacted by declining global demand, leaving us neutral.

🟡 Asia ex-Japan, China

We keep our neutral score. China’s reopening has been underwhelming and we expect growth to slow due to weakening global demand and disappointing consumption data.

🔴 EM Asia ex China

We remain negative because of the weak global manufacturing cycle and reliance on the technology sector in countries such as Taiwan and South Korea, although Korean exports look to have bottomed and have now rebounded slightly.

Government bonds

🟡 US

We keep our neutral score. The inverted yield curve mean US government bonds are expensive to hold, and we believe the Federal Reserve has not finished hiking rates.

🟡 UK

We remain neutral. The Bank of England has stepped up its pace of rate hikes to quell rising core inflation with UK wages rising at a consistently high rate.

🟡 Germany

We remain neutral. Whilst we are seeing signs of core inflation easing in Europe, German government bonds are expensive to hold.

🟡 Japan

We keep our neutral score. The Bank of Japan’s (BoJ) new governor has pledged to maintain loose monetary policy to stabilise inflation, and absolute yield levels are unattractive.

🟡 US inflation linked bonds

Although we have a neutral view, we do prefer US inflation-linked bonds relative to nominal bonds given their inflation hedging properties.

🟢 Emerging markets local currency bonds

We remain positive as inflation has been falling, leaving some countries close to their targets. Latin America is the most favoured region given positive real yields.

Investment grade credit

🟡 US

We remain neutral, spreads are looking expensive and valuations in the US have become richer compared to Europe.

🟢 Europe

We continue to prefer high quality credit in Europe. Spreads are attractive and this asset class offers a positive carry.

🟡 Emerging markets USD

A handful of positive, idiosyncratic stories across the most distressed borrowers has triggered a meaningful rally, which we believe could be an indication of more productive debt talks. However, we prefer to remain neutral.

High yield bonds (non-investment grade)

🟡 US

Spreads have tightened and have clearly decoupled from growth indicators, rallying off equity sentiment. This has left valuations expensive and so we remain neutral.

🟡 Europe

Whilst European valuations are more attractive than in the US, we prefer higher quality credit and as such remain neutral.

Commodities

🟢🔼 Energy

We believe there will be a significant market deficit for the rest of 2023, as cuts from Saudi Arabia and Russia feed through to the market. We forecast a drawdown in global inventories that will likely push prices higher.

🟡 Gold

Whilst we expect gold to perform on any sign of weakness in the labour market, higher rates and a robust US dollar may prove a headwind for gold prices, so we remain neutral.

🟡 Industrial metals

We remain neutral due to the tentative growth dynamics and a lack of any significant policy response from China.

🟢🔼 Agriculture

The combination of El Niño and an extended drought in the US have created significant risks to crop yields, which have not yet been reflected in market pricing.

Currencies

🟡 US $

We remain neutral on the dollar. Its attractive carry and hedging properties are useful in a portfolio context but are balanced by expectations that US rates are close to peaking.

🟡 UK £

We remain neutral on sterling. Whilst we believe the currency should benefit from interest rate rises, we prefer to stay on the side-lines given potential volatility.

🟡 EU €

Whilst macro factors such as growth and inflation data should put downward pressure on the euro, we keep our neutral view given the potential for further rate rises.

🟡 CNH ¥

We remain neutral, due to trade cycle dynamics and as the level of carry is not particularly attractive.

🟡 JPY ¥

Whilst the yen could be viewed as a safe-haven currency, given its low level of absolute carry, we prefer to remain neutral.

🟡 Swiss franc ₣

We keep our neutral score as similar to the yen, the Swiss franc is considered a low yielding, safe haven currency.

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

Source: Schroders, July 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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