Our multi-asset investment views - July 2021
Our multi-asset investment views - July 2021
MAIN ASSET CLASSES
Despite growth momentum peaking, our models suggest equities will continue to deliver positive returns, supported by upgraded corporate earnings forecasts.
We remain negative. Valuations appear expensive and we are approaching the “expansion” phase of the economic cycle, which presents a headwind. Recent “hawkish” comments from Federal Reserve (Fed) monetary policymakers (such policymakers are often described as hawkish when expressing concerns about limiting inflation) indicate the loose US liquidity environment (i.e. one where readily available funds are in ample supply) is approaching an end. Inflationary risks are increasing.
We have retained our positive view as the market is positioned for an economic recovery fuelled by central bank stimulus. Commodities tend to perform well in the expansion phase.
We maintain our negative score as valuations continue to deteriorate. Credit spreads have reached extreme levels and the market is highly vulnerable to shifts in sentiment and market technicals. 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.
We expect the US market to perform well as the reopening of more areas of the economy will help corporate earnings to further improve.
The UK offers attractive exposure to the economic recovery and cheap valuations, but the strength of the pound still weighs on a market with high foreign revenues.
We see potential for equities in Europe to catch-up as earning revisions remain high, resulting in a pick-up in flows.
We have downgraded Japan due to the country’s ongoing struggles with the virus and its exposure to risks related to the economic cycle.
We continue to favour Korea and Taiwan as their manufacturing outlook remains bright, with low semiconductor inventories and an environment of high global demand.
Relatively attractive valuations and rebounding earnings revisions mean we keep our positive view given the reopening theme is still intact.
We remain negative given recent falls in the US 10 year government bond yield. Our “fair value" model suggests current levels appear expensive and real yields are at a low for the economic cycle.
Gilt yields remain close to their historic lows despite the economy rebounding as it re-opens. The Bank of England has also started to taper its quantitative easing (QE) program and is likely to continue on this path during H2 2021.
We have reduced the degree of our negative view on German Bunds because of the likely divergence in monetary policy between a “dovish” European Central Bank (ECB) and a hawkish Fed.
Yields have moved lower as the Bank of Japan continues to manage the yield curve. Newly announced Covid-19 restrictions will likely cause the economy to contract again.
US inflation linked bonds
Flows increased recently on the view that recent rises in inflation are transitory. However, the Fed’s hawkish comments on tapering QE indicate inflation expectations are priced in.
Emerging markets local currency bonds
Potential strengthening of the US dollar, poorer handing of Covid-19 and concerns over fundamentals in some emerging market countries mean we maintain our neutral view.
Investment grade credit
Comments from the latest Fed meeting are likely to increase volatility and market uncertainty. Valuations are also at extremely high levels, creating upside risk to returns.
Despite stronger technicals underpinned by ECB action, credit spreads remain tight and therefore valuations appear increasingly stretched.
Emerging markets USD
Valuations stand out as attractive in the global corporate credit universe with credit conditions broadly benign, bolstered by a slight shift in stance towards easing in China.
High yield bonds (non-investment grade)
Although the increasing incidence of rising stars (HY credit upgraded to IG credit) means spreads could tighten further, we remain negative. This is because the impact is likely to fade as the market outlook for interest rates and liquidity is set to reverse.
Improved fundamentals and low default rates are offset by deteriorating valuations and the lack of a coordinated fiscal recovery programme (fiscal programmes, like monetary policy, are means by which policymakers attempt to manage economic fluctuations).
The global energy market remains in deficit and inventories continue to be depleted. With demand expected to continue to increase, we remain positive.
We remain neutral as we see opportunities for the price to rise from current levels and converge with higher real yields.
Demand outside China is picking up strongly amid the global recovery. This offsets the moderation in Chinese demand reflected in domestic data.
We have downgraded our view as we expect bullish supply factors will begin to fade following recent solid gains in the sector.
We have upgraded the US dollar as the Fed proposes to adopt a more hawkish stance. The currency now offers attractive hedging properties for our portfolios.
We have remained neutral. While economic growth and monetary policy are positive in the UK, the pound is expensive with valuations at a three-year high.
Progress in the vaccination roll out in Europe provides an opportunity for regional economies to catch up with the US, but we remain neutral as inflation is below target.
Our score continues to reflect Japan’s worse vaccine story, lower growth, inflation and interest rate outlook compared to the US, along with a negative yield differential.
Swiss franc ₣
We remain negative as the franc’s defensive characteristics mean it will be unlikely to outperform other currencies in an environment of recovering global growth.
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