Snapshot - Economics

Our multi-asset investment views for January 2019

In our latest monthly update we highlight the need to strike a balance between improving valuations but worsening momentum indicators.

18 January 2019

Key

Asset classes

 
 

Equities

In the short term equities may remain weak amid a risk that earnings outlooks may be cut, although they may look better value on a mid to long-term view.

 
 

Government bonds1

We are inclined to take some profits now but may turn more positive on a 6-12 month view given our expectations for slower growth in 2019-20. 

 
 

Commodities

We see limited prospects for gains, unless US-China trade tensions dramatically ease. 

 

Credit2

The recent rise in yields (and therefore fall in prices) has created some select value opportunities. However, we continue to retain our cautious outlook. 

 

1. Bonds are a way for governments and companies to raise money from investors. In exchange for an upfront payment from investors, the issuer will make annual interest payments and repay the initial investment amount on a fixed future date.

2. A corporate bond, or a bond issued by a company.

Equities

 
 
 

US

US shares may remain volatile as investors evaluate the likelihood of an early recession. While prices seem more reasonable, outlooks could be revised down further. 

 

Europe

We remain cautious based on concerns that earnings for EU companies are deteriorating faster than in other regions, and economic activity indicators remain weak.

 

UK

We expect the market to remain volatile as sterling (GBP) swings on Brexit news.

 
 

Japan

With the deteriorating outlook for global growth and a stronger yen (JPY), exports may face challenges, while there is not enough evidence of a pick-up in domestic activities.

 

Pacific ex-Japan

Given the relatively connected nature of the regional economy to global trade,  we keep a neutral stance.

 

Emerging markets

Valuations are, in our view, attractive. A pause in the rate rises from the Fed would limit US dollar strength and help EM assets.

 

Government bonds

 
 
 

US

While valuations (prices) look high, this appears justified by the growing possibility of an economic slowdown.

 

UK

Brexit uncertainty continues to complicate the outlook for gilts (UK government bonds). 

 

Germany

Bunds (German government bonds) look expensive but European data continues to disappoint, calling into question the ability of the European Central Bank to raise interest rates in 2019. 

 

Japan

Whilst Japanese data has shown a rebound from 2018’s weather/tsunami effects, we nonetheless expect the Bank of Japan to leave monetary policy unchanged.

 
 

US inflation linked

We see value here.

 

Emerging markets local

The headwind of a slower economy continues to prevent us from taking advantage of the improvement in local market valuations.

 

Investment grade (IG) corporate bonds3

 
 

US

The increasing cost of borrowing will likely weigh on corporate earnings, while the continuing deterioration in the quality of the universe is also a source of vulnerability. 

 

Europe

Notwithstanding political noise, recent price moves have created some value opportunities. That said, we remain cautious. 

 

Emerging markets USD

We see some pockets of opportunity, principally amongst higher quality credits.

 

3. The highest quality bonds as assessed by a credit ratings agency. To be deemed investment grade, a bond must have a credit rating of at least BBB (Standard& Poor's) or Baa3 (Moody's).

High yield bonds

 
 

US

We expect the excessive level of bond supply may worsen in US high yield.

 

Europe

We expect the European high yield bond market to underperform the US.

 

Commodities

 
 

Energy

Our view remains unchanged given a stable (as opposed to a rising) oil price, which we expect to support reasonable levels of returns.

 

Gold

Gold continues to show safe-haven characteristics.

 

Industrial metals

Forward-looking indicators of Chinese economic growth are still in a downward trend, weighing on the demand outlook. 

 

Agriculture

This sector has relatively low sensitivity to global growth and equity volatility, and is supported by supply/demand dynamics and weather risks in 2019 H1.

 

Currencies

 
 

US dollar

Our base case is still for global growth stabilisation whilst the US economy softens further. 

 

UK sterling

Whilst a no-deal Brexit is still a possibility, this appears to have been priced into GBP (sterling).  

 

Euro €

US growth weakness and (crucially) the Fed readjusting its rate hiking expectations allows for more stable sentiment towards the euro. 

 

Japanese yen ¥

The yen remains undervalued and a hedge against further growth disappointment. 

 

Swiss franc ₣

Recent Swiss franc strength is at odds with weak growth data, which should force the Swiss National Bank to keep monetary policy dovish.

 

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