Our multi-asset investment views - February 2020

We remain positive despite potential heightened volatility in the coming weeks as a result of the COVID-19 outbreak. Ample liquidity (i.e. readily available funds) and low bond yields continue to support elevated valuations.

We favour bonds with longer maturities, especially those that are inflation-linked. This is because there is ample liquidity globally and yield hunting investors are likely to keep demand high.

Global liquidity conditions, as discussed above, remain supportive. Prices remain constrained, with no increase in demand and a continued slowdown in supply.

Despite spreads drifting slightly wider in January, the overall score is unchanged. Our positive view is supported by strong demand and a benign global central bank outlook.

There is no change in our view as the recent pick-up in economic data balances the probability that the Federal Reserve is likely to cut rates by the end of Q2. In addition, the return from US bonds versus cash is still attractive relative to other markets.

As the economy is forecast to rebound, the Monetary Policy Committee opted to keep rates on hold citing the reduced political uncertainty and early signs of recovery in economic activity.

Germany’s sensitivity to Chinese growth, combined with the European Central Bank’s negative interest rate policy means we expect Bund yields to rise should the market environment improve.

The VAT hike and coronavirus outbreak represent risks and as a result the Bank of Japan is likely to continue to promote accommodative monetary policies. Nevertheless, inflation continues to show stable albeit weak signs of improvement.

We continue to be positive US Treasury Inflation-Protected Securities as a potential protection should growth disappoint.

We remain neutral. While the medium-term growth outlook is largely optimistic and inflation relatively contained, yields are low (prices high) so valuations are stretched.

We continue to favour the US corporate bond market. Low interest rates and the search for yield have driven investors to the US investment grade market and ample liquidity should support demand in the short term. 

While the market is reasonably valued and demand has been stronger, significant exposure to China and other risks mean we remain neutral.

We retain a bias toward higher quality emerging market corporates as their fundamentals are more stable.

We still prefer US high yield corporate bonds (those deemed by rating agencies to be below investment grade in quality) despite being near the end of the cycle. Nonetheless, there is still room for spreads (the difference in yield between two different bonds that are the same in all aspects except for the credit rating) to tighten and for positive returns if growth remains positive.

We keep our neutral stance. Fundamentals are stretched but default rates have reduced slightly from their recent peak and technical factors are broadly supportive.

Whilst COVID-19 has dampened demand, we see upside in energy markets as declining oil prices have compressed profit margins. This, combined with action from the Organization of the Petroleum Exporting Countries, leads us to expect a fall in supply.

Falling real US interest rates mean that owning gold is potentially an attractive hedge in the current late-cycle environment.

The coronavirus outbreak has been a negative. However, we believe demand will be deferred rather than lost so expect it to recover after Q1 2020.

The US-China phase one trade deal should benefit agricultural prices.

We have upgraded our view on the US dollar as the impact of coronavirus on the global supply chain and economic growth remains uncertain.

We have upgraded our view on sterling to neutral. We see Brexit politics taking a breather and growth being supported by the Conservative government’s plans to increase spending.

Despite promising survey data in Europe, we recognise the impact of the coronavirus is not fully reflected in markets and might trigger further volatility. The euro usually underperforms relative to the US dollar when investors are cautious.

As economic activity slows the Federal Reserve and Bank of Japan are likely to promote more accommodative monetary policies. However, at this point in time the outlook for monetary policy has not changed.

Our view is unchanged. We expect a mild weakening versus the US dollar as we see the Swiss National Bank taking action to contain further appreciation in the currency, which has depressed economic growth.