Our multi-asset investment views - November 2020
Our multi-asset investment views - November 2020
MAIN ASSET CLASSES
We expect the reduction in uncertainty following the US presidential election, the positive news on vaccines and the ongoing economic recovery to support equities.
Despite the recent rise in yields (bond prices fall when yields rise) overall government bond markets remain expensive. Upside is limited so we maintain our neutral view.
We remain neutral due to weaker demand. The economic recovery is necessary to upgrade our view but insufficient on its own.
Despite an uptick in Covid-19 cases in Europe and North America, we retain a positive view overall. We have a preference for higher quality “investment grade” corporate bonds over lower quality non-investment grade (“high yield”).
The likely Biden/split Congress election result suggests four more years of supportive liquidity (i.e. readily available funds). We continue to favour the “quality” and “growth” characteristics of the US market.
A resurgence in Covid-19 cases, accompanying restrictions and Brexit risks remain. However, we have upgraded the UK as we believe these negatives have been priced in.
Although there is some uncertainty on fiscal coordination, we have upgraded Europe due to the recent news on the efficacy of the Covid-19 vaccines.
We’ve upgraded Japan due to recent news on the efficacy of the Covid-19 vaccines, combined with activity normalising and an economic recovery underway.
With positive news on the efficacy of the Covid-19 vaccines, we expect the economic recovery to continue, aided by fiscal and monetary policy.
We continue to favour emerging markets, buoyed by the strength of the recovery in China, and some alleviation of the trade war risks from the expected Biden victory.
Following the recent rise in yields (bond prices fall when yields rise), US nominal (non-inflation-linked) bonds are beginning to look interesting again as a hedge against growth disappointing.
We maintain our view that there is less value in gilts given their poor relative returns in comparison to other developed markets.
We retain our view that Germany is a very expensive market and a strong euro creates an additional headwind for the European Central Bank (ECB).
With inflation still likely to remain significantly lower than target, the Bank of Japan will need to keep its unconventional policies in place.
US inflation linked bonds
Following the recent rise in yields, Treasury Inflation-Protected Securities (TIPS) now appear less favourable in comparison to nominal bonds.
Emerging markets local currency bonds
Our view is unchanged. We still see medium-term opportunities which are likely to provide higher yields and the majority of markets have factored in further rate cuts.
Investment grade credit
Credit spreads have limited room to tighten further and fundamentals are weak. However, technical factors remain supportive, with the Federal Reserve (Fed) expected to extend its purchasing scheme. The credit spread is the margin that a company issuing a bond has to pay an investor in excess of government yields and is a measure of how risky the market perceives the borrower to be.
Although fundamentals are weak, demand is robust due to the ECB increasing its purchases back to levels seen in March and June of this year.
Emerging markets USD
We retain our longstanding preference for high quality corporates. We believe the level of real interest rates is likely to remain the key driver of credit defaults, extensions and spreads.
High yield bonds (non-investment grade)
The US high yield (HY) bond market is less attractive than European HY market due to the Fed’s loose monetary policy in the form of quantitative easing.
We retain our preference for European HY as we expect support from the ECB in the form of the pandemic emergency purchase programme (PEPP) to continue into 2021.
Given the extreme market pessimism until the vaccine news, we believe there is now a valuation-driven opportunity, particularly in US energy.
Recent optimism on the vaccine, combined with signs of an economic recovery and a normalising of activity, leads us to maintain our neutral view on gold.
Although industrial metals could benefit from a recovery, China is tightening liquidity. Therefore, we are reluctant to upgrade given the uncertainty on fiscal stimulus.
Although we prefer to stay on the sidelines for the time being, the sector is resilient due to demand from Chinese trade commitments.
We maintain a positive view on the US dollar and prefer it as a means of offering protection against financial loss.
As we await the outcome of Brexit negotiations and the economic impact of Covid-19 lockdowns we remain neutral on sterling. There is a glimmer of hope, however, on the horizon.
We maintain a neutral view on the euro as growth has deteriorated due to lockdowns. However, we expect that aggressive central bank support will help next month.
With the US election out of the way and positive news on vaccine efficacy, the outlook for the yen has weakened. For this reason we have downgraded our view.
Swiss franc ₣
We expect the Swiss franc to remain range-bound due to the better environment for risky assets compared with the European Covid-19 lockdown despair.
Source: Schroders, November 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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The views and opinions contained herein are those of Schroders’ investment teams and/or Economics Group, and do not necessarily represent Schroder Investment Management North America Inc.’s house views. These views are subject to change. This information is intended to be for information purposes only and it is not intended as promotional material in any respect.