Our multi-asset investment views - April 2020
Our multi-asset investment views - April 2020
MAIN ASSET CLASSES
The volatility seen in financial markets is likely to remain elevated as investors try to assess their expectations about the shape of the recovery.
Although government bonds remain expensive, we believe some exposure is necessary in case Covid-19 disruption causes a global recession.
We remain neutral in commodities as Covid-19 will continue to suppress demand, with the energy and industrial sectors particularly affected. We are positive on gold as global growth is weak.
Valuations have improved as further market-friendly policy initiatives have improved the availability of credit.
Although valuations have become cheaper, we remain cautious given the continued lack of clarity on the impact that Covid-19 will have on businesses and the economy.
We have downgraded as Covid-19 lockdown measures are depressing the economy. There are also concerns over whether businesses will be able to access the government’s financial support schemes in time.
We have downgraded because of the economic impact of the virus. The lack of consensus by European governments on stimulus packages and the potential strengthening of the euro could also stifle growth.
We have downgraded to double negative based upon potential disruption to supply chains as Japan was the last major economy to go into lockdown.
Economic conditions in Australia will be weak, with banks expected to cut dividends. A possible second wave of Covid-19 infections in Singapore and Hong Kong could also weaken investor confidence.
We have downgraded to neutral as we expect equities to be hurt by a poor earnings season and disappointing economic data despite attractive valuations and signs of recovery in China.
We remain neutral as although yields remain low, US bonds could offer a higher yield relative to equities. We continue to prefer 30-year bonds as they offer higher yields.
We remain neutral as although the Bank of England has been cutting interest rates and restarting quantitative easing to support the UK economy, the Covid-19 lockdown could hamper the economic recovery.
We remain negative as despite the German government’s quick response to Covid-19, Bund yields remain negative and there is limited room for yields to fall further.
The Bank of Japan will have to keep its unconventional fiscal policies in place for longer as the lockdown has been extended to cover the whole country. Monetary policy attempts to reduce economic fluctuations by regulating the supply of money in an economy using interest rates and other methods, and is controlled by a central bank.
US inflation linked
We have upgraded as traded inflation has bounced recently. However, it remains far below the Fed’s inflation targets.
Emerging markets local
We remain neutral. Covid-19 hit growth in China in the first quarter and its impact is beginning to show in other emerging market (EM) countries. EM central banks remain cautious, with some introducing fiscal stimulus policies to support their economies.
Investment grade credit
In the US investment grade corporate bond, or credit market, the Federal Reserve’s move to buy corporate credit provides liquidity to the market. Valuations are attractive and there is potential for spreads (the difference between the quoted rates on two different investments) to contract further.
The European Central Bank (ECB) has also announced corporate credit purchases. Although valuations are compelling, the fundamentals remain weak.
Emerging markets USD
The sell-off in EM hard currency credit has made valuations inviting. We are more positive towards higher quality corporate bonds.
High yield bonds (non-investment grade)
Valuations are attractive and the market is well supported by the US Federal Reserve’s decision to buy corporate credit, including so-called ‘fallen angels’ (those companies downgraded from investment grade).
We have upgraded our view to positive, mostly based on valuations. Although, we are more positive on US high yield (HY) we expect spreads to tighten further in European HY as well.
We remain neutral as the market is heavily over-supplied and the fall in demand has yet to be met with an adequate response.
We remain positive on gold. Deteriorating economic data, continued policy easing and a compression in real rates should allow further gains to be made in the months ahead.
Covid-19 containment measures led to a collapse in economic activity and demand for industrial metals. Short-term price movements could be volatile and will depend on how long the lockdowns remain in place.
Economic downturn and recession is normally deflationary for agricultural commodities. However, prices could rise as the spread of Covid-19 in major food producing regions disrupts supply chains and could lead to potential export bans.
We remain neutral as intervention by the Federal Reserve to increase the supply of money to the market has led to lower growth.
We have upgraded to positive as we expect better relative growth compared to Europe as a result of the UK’s co-ordinated fiscal and monetary response to Covid-19.
We have downgraded to negative as the slow economic response to Covid-19 from the ECB and political uncertainty around support measures between Italy and Netherlands/Germany will put pressure on the euro.
Given there is no interest rate differential story, risk sentiment is likely to be more important as a driver of the currency. Optimism around Covid-19 and more liquidity should offset the poor cyclical outlook.
Swiss franc ₣
We have downgraded the Swiss franc back to neutral as it has become expensive. Intervention by the Swiss National Bank has also led lower use of the currency as a safe haven.
Source: Schroders, April 2020. 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.
Please note any past performance mentioned is not a guide to future performance and may not be repeated. The sectors, securities, regions and countries shown are for illustrative purposes only and are not to be considered a recommendation to buy or sell.
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