Our multi-asset investment views - January 2020
MAIN ASSET CLASSES
Although valuations are beginning to turn expensive, equities (shares) still appear attractive relative to both bonds and cash.
We favour bonds with longer maturities, especially those that are inflation-linked. This is because there is ample liquidity (ie readily available funds) globally and yield-hunting investors are likely to keep demand high.
Global liquidity conditions, as discussed above, remain supportive, but unless there is an increase in demand and a slowdown in supply, prices are likely to remain constrained.
Looking at valuations, the recent rise in prices (fall in yields) puts pressure on our overall positive view. However, because demand for corporate bonds remains strong due to central bank policy, we maintain our positive stance.
Upgraded this month, as economic activity indicators continue to suggest the economy is stabilising. Plus, the recent signing of the US-China trade deal should support company profits.
The recent election result provided some confidence to markets. Nevertheless, little has actually been solved in trade negotiations with the EU.
Economic indicators in Europe continue to show signs of a mild recovery. The US-China trade deal should also support European corporate profits going into 2020.
Despite the recent strong performance which has seen valuations rise, we remain positive on Japanese equities. This is because the country’s growth outlook continues to improve and valuations remain attractive relative to history.
Economic indicators are stabilising for both domestic and export areas, and monetary policy support continues to come through.
While developed market earnings remain fairly stable, emerging market earnings are seeing signs of improvement. At the same time, valuations continue to look attractive relative to their developed market counterparts.
Although bond yields are yet to reflect the improvement in economic data, , their long-term returns are still better than cash.
Despite upgrading slightly, we still remain negative. This is because our economists expect UK growth to pick up in 2020 (which would be negative for bonds) due to the clear parliamentary majority and less business uncertainty.
Economic indicators point to a turnaround in European economic data and we expect real yields to rise (bond prices fall when yields rise).
Sentiment is lifting after the VAT hike, and with an improvement in trade data, together with Bank of Japan sounding less dovish, we expect growth will likely improve.
US inflation linked
We remain positive due to an improving global growth outlook and potential for inflation to be higher than expected.
Emerging markets local
The growth outlook in emerging markets looks to be improving, causing yields to rise (prices to fall).
Investment grade corporate bonds
The US is still our preferred corporate bond market. However, we remain aware that valuations are becoming more expensive.
The gap between Europe and US corporate bond quality appears to be narrowing, as more leveraged and foreign issuers tap the European market.
Emerging markets USD
We downgrade EM sovereign bonds, although remain positive on corporate EM bonds.
High yield bonds (non-investment grade)
We continue to favour US high yield (those deemed by rating agencies to be below investment grade in quality) with the strong demand and liquidity backdrop supporting prices.
While there remain lingering concerns about deteriorating fundamentals, low interest rates continue to support demand for the asset class given the yields on offer.
Additional shale gas supply from the US combined with non-US/OPEC supply increases will continue to spur a supply glut, putting downward pressure on prices.
Gold is a potentially attractive hedge at the late stage of the economic cycle, as it is seen as an asset that may be able to protect against inflation and a slowing economy.
We remain neutral on industrial metals as our more optimistic shift on the underlying macro-economic landscape for 2020 is offset by increased supply in response.
The phase one trade deal between the US and China should benefit agricultural prices, but record South American harvests remain a concern due to a possible glut in supply.
USD valuation has fallen to its lowest level since Jun 2018, but it remains on the boundary between expensive and fair value.
We remain negative as recent weaker data is leading to speculation that the Bank of England will now cut interest rates, which would be negative for sterling.
Stabilisation of European data, and some trade resolution between the US and China, should improve sentiment towards Europe.
Reduced recession and geopolitical risk, combined with a stable Federal Reserve, warrants a neutral score on this perceived safe haven currency.
Swiss franc ₣
Recent inflation numbers were worse than expected opening Switzerland to risk of relapsing into deflation. The Swiss National Bank has lowered its inflation forecast.
Source: Schroders, January 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 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.
Important Information: This communication is marketing material. The views and opinions contained herein are those of the author(s) on this page, and may not necessarily represent views expressed or reflected in other Schroders communications, strategies or funds. This material is intended to be for information purposes only and is not intended as promotional material in any respect. The material is not intended as an offer or solicitation for the purchase or sale of any financial instrument. It is not intended to provide and should not be relied on for accounting, legal or tax advice, or investment recommendations. Reliance should not be placed on the views and information in this document when taking individual investment and/or strategic decisions. Past performance is not a reliable indicator of future results. The value of an investment can go down as well as up and is not guaranteed. All investments involve risks including the risk of possible loss of principal. Information herein is believed to be reliable but Schroders does not warrant its completeness or accuracy. Some information quoted was obtained from external sources we consider to be reliable. No responsibility can be accepted for errors of fact obtained from third parties, and this data may change with market conditions. This does not exclude any duty or liability that Schroders has to its customers under any regulatory system. Regions/ sectors shown for illustrative purposes only and should not be viewed as a recommendation to buy/sell. The opinions in this material include some forecasted views. We believe we are basing our expectations and beliefs on reasonable assumptions within the bounds of what we currently know. However, there is no guarantee than any forecasts or opinions will be realised. These views and opinions may change. To the extent that you are in North America, this content is issued by Schroder Investment Management North America Inc., an indirect wholly owned subsidiary of Schroders plc and SEC registered adviser providing asset management products and services to clients in the US and Canada. For all other users, this content is issued by Schroder Investment Management Limited, 1 London Wall Place, London EC2Y 5AU. Registered No. 1893220 England. Authorised and regulated by the Financial Conduct Authority.