Our multi-asset investment views - June 2023

🟢 Long / positive

🟡 Neutral

🔴 Short / negative

🔼 Up from last month

🔽 Down from last month

Main Asset Classes

🟡🔼 Equities

We have moved to neutral on equities as we push out our forecast on a global economic slowdown given resilient labour markets and the strong service sector.

🟡🔽 Government bonds

We have moved to neutral as the inversion of the yield curve (where long-term interest rates fall below short-term interest rates), means that bonds have a negative carry.

🟡 Commodities

We remain neutral as the goods sector remains weak, inventory levels remain stable, and China’s reopening has been underwhelming.

🟢 🔼Credit

We have upgraded credit as the removal of the debt ceiling has improved the outlook and allocating to credit gives us access to duration with a positive carry.

Equities

🟡🔼 US

A delay to any recession means earnings may rise in the short term. This - coupled with an already strong service sector - leads us to upgrade to neutral.

🔴 UK

Upwards revisions to payroll data show growth in employment, despite the very high level of inflation. The market is expecting several more rate hikes and the delayed effects, such as higher mortgages, are yet to be fully felt.

🔴 Europe

We remain negative as the eurozone plunges into recession, driven largely by a slowdown in Germany’s sizeable manufacturing sector.

🟡🔼 Japan

We have upgraded to neutral. Despite the recent rally, valuations still appear cheap. However, escaping deflation and corporate governance reforms could create potential tailwinds in the longer term.

🟡 Global Emerging Markets¹

We remain neutral as although EM central banks are ahead in their hiking cycles, the US Federal Reserve (Fed) maintaining a hawkish tone (advocating higher interest rates) creates headwinds for the asset class.

🟡🔽 Asia ex-Japan, China

The rebound in the services sector has quickly lost momentum. We have downgraded to neutral and anticipate more impactful stimulus next month.

🔴 EM Asia ex China

We remain negative due to the weak global manufacturing cycle and heavy reliance on the technology sector in countries such as Taiwan and South Korea.

Government bonds

🟡🔽 US

We have downgraded to neutral. The inverted yield curve (where short-term debt instruments have higher yields than long-term instruments of the same credit risk profile) and negative carry (where money is borrowed in a high-interest currency and invested in a low-interest currency) mean that US government bonds are unattractive to hold.

🟡🔽 UK

We have downgraded to neutral as interest rates are expected to be significantly increased to combat the persistently high inflation rate.

🟡 Germany

We remain neutral for the moment, given our belief that the European Central Bank’s (ECB) pace of rate hikes has peaked, and inflation appears to have started trending down.

🟡 Japan

We stay neutral. While Japan is still battling high inflation, the Bank of Japan’s new governor has pledged to maintain a loose monetary policy.

🟡 US inflation linked bonds

We still prefer to take exposure through nominal bonds as we expect inflation to begin to moderate.

🟢 Emerging markets local currency bonds

We remain positive as EM central banks are ahead of developed markets in their hiking cycle to contain inflation. EM inflation is falling, and we expect more cuts to come.

Investment grade credit

🟡 US

We remain neutral as financial conditions are tightening faster in the US compared with Europe, and US spreads have unattractive valuations.

🟢🔼 Europe

We upgrade to positive. There is a demand for high quality credit, spreads are above the median and financial conditions are tightening more slowly in Europe compared with the US. The sector is attractive too as it allows access to duration with positive carry.

🟡 Emerging markets USD

A soft landing would favour EM debt, but until we have clearer signals, we prefer to stay on the side-lines.

High yield bonds (non-investment grade)

🟡 US

We remain neutral. Tighter financial conditions have led to an increase in US HY default rates. Additionally, recovery rates have been falling to historical lows.

🟡 Europe

We remain neutral. Valuations have marginally deteriorated and uncompelling spreads lead us to stay on the side-lines.

Commodities

🟡 Energy

Despite production cuts from Saudi Arabia, the market appears adequately supplied. China’s reopening has played out, and we expect energy markets to remain balanced.

🟡🔽 Gold

We have downgraded to neutral as growth has remained resilient, the labour market has yet to crack and core inflation is still problematic, driving down gold prices.

🟡 Industrial metals

We remain neutral due to the weak global goods cycle, abated supply-side issues, and China's service-led recovery losing momentum.

🟡 Agriculture

Fertiliser prices continue to fall, and good growing conditions set the stage for sturdy harvests this season. We maintain our neutral view as robust demand is balanced with strong supply dynamics, presenting limited upside.

Currencies

🟡🔼US $

We have upgraded the dollar to neutral as higher than expected US growth could lead to more rate rises than previously expected. However, we remain cautious given the potential for volatility.

🟡🔽UK £

We have downgraded sterling, as although we believe the pound should benefit from high interest rates, we prefer to stay on the side-lines given potential volatility.

🟡🔽 EU €

We have downgraded to neutral as we believe that the ECB’s rates trajectory will be steadier in the coming months and we have reached a peak.

🟡 CNH ¥

Our maintain our neutral stance due to trade cycle dynamics. Additionally, the level of carry on offer is still not deemed particularly attractive.

🟡 JPY ¥

We remain neutral. Given the shift from inflation to slowing growth, the yen could be viewed as a safe haven currency.

🟡 Swiss franc ₣

We remain neutral on the Swiss franc, similar to the yen this is considered a safe haven currency.

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

Source: Schroders, June 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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