Snapshot

Our multi-asset investment views - July 2022


Key

 
 
 

MAIN ASSET CLASSES

 
 

Equities

We maintain our negative view on equities. We have seen bond yields edge slightly lower, and while this may mean the derating in valuations is over, we note that earnings downgrades have only just begungiven the uncertainties around interest rates. Interest rates are a key component of discount rates, which are used to discount a company’s future expected earnings and cashflows in order to compute its theoretical value in today’s money, or “present value”.

 

Government bonds

Although valuations generally look fair and correlations between equity and bonds are starting to improve, the probability of bonds being a diversifier remains low as inflation could surprise further on the upside.

 

Commodities

We remain neutral, as although supply is still tight, weakening global growth is hitting demand, particularly in the energy sector.

 

Credit

Given stagflationary concerns, our outlook remains cautious, with a preference for investment grade bonds (those that are believed to have a lower risk of default) over high yield bonds (those that pay a higher rate of interest as they have a higher risk of default, also known as junk bonds).

Equities

 
 

US

The stabilisation in valuations may imply that prices may be close to bottoming out; however, we feel earnings expectations still do not reflect the risks to growth.

 

UK

We remain neutral as the positive characteristics of the defensive and commodity tilts in the index are offset by reductions in demand for energy.

 

Europe

The challenges posed by natural gas supply and cost issues, combined with the European Central Bank (ECB) being stuck between a rock and a hard place, will be a challenge for equity returns.

 

Japan

Japan is one of the few regions where inflation is welcomed. This should lead to some relative outperformance against other regions in the developed world.

 

Global Emerging Markets1

While the problems facing China seem to be alleviating, other emerging market (EM) countries face mounting inflationary pressure, meaning we retain a neutral score overall.

Asia ex-Japan

 

China

We are positive as China looks to have finally turned a corner as policymakers continue to ease conditions.

 

 

EM Asia ex China

We continue to believe that other regions in the EM universe appear more attractive.

Government bonds

 
 

US

We remain neutral as the determination of the US Federal Reserve (Fed) to bring inflation under control should anchor longer dated bonds at a higher level whilst simultaneously flattening the curve.

 

UK

We remain negative as the growth outlook is gloomy and fiscal subsidies announced for households could push the Bank of England to raise interest rates further.

 

Germany

We remain negative on German bonds, although slightly less so than last month, given that the ECB has been slow in addressing strong inflationary pressures.

 

Japan

Our view is unchanged. The market continues to offer negative yields that provide poor value relative to other markets.

 
 

US inflation linked bonds

We have upgraded to neutral as the Fed remains determined to bring down inflation by aggressive rate hikes. If medium term inflation concerns continue to linger, inflation-linked bonds should benefit.

 

Emerging markets local currency bonds

Our view is unchanged as the economic environment remains challenging, with stagflationary as well as recessionary risks growing. Stagflation is a combination of slowing growth and accelerating inflation.

 

Investment grade credit

 
 

US

Our view is unchanged. While spreads have widened, any potential upgrade would require fixed income markets to stabilise and offer more attractive valuation levels.

 

Europe

The ECB is being less proactive compared to other central banks and spreads are extremely wide compared to the US, leading to attractive valuations.

 
 

Emerging markets USD

We have upgraded our view on the sector as it has significant exposure to the Chinese recovery and is now pricing in European risk.

 

High yield bonds (non-investment grade)

 
 

US

We remain negative as the technical backdrop is vulnerable with issuance of US HY low and fundamentals continuing to deteriorate.

 

Europe

We maintain our neutral score. Although credit spreads have moved a long way, there is no explicit support from the ECB, which is prioritising raising rates and ending asset purchases.

 

Commodities

 
 

Energy

Supply is still tight; however, we are seeing signs of demand weakness outside the US where high energy prices and a strong dollar are squeezing consumers.

 
 

Gold

We downgrade to neutral due to mounting liquidity risks, which create issues around the short-term availability of money and wait to re-enter at better levels.

 
 

Industrial metals

We have downgraded our view to neutral. Ex-China demand looks uncertain and although Chinese activity is showing signs of recovery, potential lockdowns due to the zero-Covid policy will continue to drag on consumer and business sentiment.

 

Agriculture

We remain positive as input costs, a key driver, are still rising. Food security concerns are forcing governments of producing countries to control exports, keeping prices elevated.

 

Currencies

 
 

US $

We continue to favour the US dollar. Despite the prospect of weaker global growth, the rise in inflation continues to push the Fed down a path of aggressive rate hikes, supporting the US dollar with its safe haven currency status.

 

UK £

The turn in the cycle and the worsening stagflationary environment, coupled with political instability have weighed on the currency. The pound appears to have priced these factors in appropriately, leaving us neutral.

 

EU €

The ECB continues to face a dilemma of having hawkish forward guidance on rates but lacking concrete measures to manage spread levels, which may tempt the market to test. Monetary policymakers are often described as hawkish when expressing concerns about limiting inflation.

 

CNH ¥

We remain negative as we expect the depreciation in the renminbi (offshore) to continue. This will help to cushion the impact of reduced demand for Chinese exports as high energy prices weaken US consumer confidence and retail sales.

 
 

JPY ¥

We have upgraded to neutral. While attractive on a valuation basis, the yen has not been a reliable hedge recently, but it should provide some protection against growth risks.

 
 

Swiss franc ₣

We have upgraded to neutral, noting the Swiss National Bank’s more hawkish stance and surprise rate hike. The franc’s negative carry means it is attractive as a short position.

 

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

 

Interested in learning more about Schroders Multi-Asset funds?

Multi-Asset – Institutions

Multi-Asset – Advisers

Multi-Asset - Individuals

Important Information:
This material has been issued by Schroder Investment Management Australia Limited (ABN 22 000 443 274, AFSL 226473) (Schroders) for information purposes only. It is intended solely for professional investors and financial advisers and is not suitable for distribution to retail clients. The views and opinions contained herein are those of the authors as at the date of publication and are subject to change due to market and other conditions. Such views and opinions may not necessarily represent those expressed or reflected in other Schroders communications, strategies or funds. The information contained is general information only and does not take into account your objectives, financial situation or needs. Schroders does not give any warranty as to the accuracy, reliability or completeness of information which is contained in this material. Except insofar as liability under any statute cannot be excluded, Schroders and its directors, employees, consultants or any company in the Schroders Group do not accept any liability (whether arising in contract, in tort or negligence or otherwise) for any error or omission in this material or for any resulting loss or damage (whether direct, indirect, consequential or otherwise) suffered by the recipient of this material or any other person. This material is not intended to provide, and should not be relied on for, accounting, legal or tax advice. Any references to securities, sectors, regions and/or countries are for illustrative purposes only. You should note that past performance is not a reliable indicator of future performance. Schroders may record and monitor telephone calls for security, training and compliance purposes.