Our multi-asset investment views for July 2018
Our analysis suggests equity valuations are fair compared to long-term history but look more expensive versus recent history.
We remain negative on government bonds. Valuations are still slightly expensive and we see risks that could cause prices to fall, but we are wary of downgrading further during the summer lull.
We have upgraded commodities this month after the recent correction as economic indicators have stabilised and should be supportive.
A sharp deterioration in sentiment and rising US interest rates has created an unfriendly backdrop for corporate bonds.
The US continues to be the most resilient economy, in our view, and we expect to see strong earnings growth continue.
Despite attractive valuations and a weaker euro, headwinds such as concerns around global trade and the removal of quantitative easing (QE) remain.
Uncertainties around ongoing Brexit negotiations continue to weigh on UK equity growth potential.
We remain neutral on Japan as recent weakness in macroeconomic data points to a slowdown. Further yen strengthening would be a risk.
Within the region, we have removed our positive bias for Singapore following some unexpected recently-announced measures to cool the property market.
Valuations are attractive compared to developed markets, though trade war escalation and a stronger dollar may be a drag in the near-term.
US government bonds (known as Treasuries) are still expensive considering the large increase in supply and that higher yields are available in Europe.
We remain negative. We see UK government bonds (known as gilts) are still expensive after recent outperformance.
The European Central Bank reaffirmed its intention to end its bond-buying programme this year, removing significant support for German government bonds (known as Bunds).
Although bond yields are low and investors expect the Bank of Japan to eventually reduce/remove economic stimulus, it’s too early for us to downgrade.
US inflation linked
We are currently positive on US inflation but are considering taking profits as there may be some short-term seasonal factors which have a negative effect (such factors can include weather or cultural events).
Emerging markets (in local currency)
No change for now, but valuation improvements point towards a possible upgrade if the economic backdrop improves.
Investment grade (IG) corporate bonds
US IG corporate bonds
Debt is rising again in the US in spite of very strong profits. There is increasing pressure on management to prioritise shareholders over holders of corporate bonds.
European IG corporate bonds
European companies are in a stronger positon, though the recent pickup in mergers and acquisitions shows we might be getting to a late stage of the economic cycle. An economic slowdown tends to be negative for corporate bonds.
Emerging markets USD
We slightly favour corporate bonds from emerging markets over government bonds from emerging markets.
High yield (non investment grade) bonds
Demand remains strong, supported by a robust domestic economy in the US. But from a valuation perspective, we believe the sector is expensive and vulnerable.
Political flare-ups in the eurozone could prove a hindrance to the sector, hence we downgrade.
Oil supplies remain tight amid robust global demand, while falling Venezuelan output and Iranian sanctions continue to offer support.
We have upgraded gold as the price recently corrected and the interest rate environment should be supportive.
We remain positive on industrial metals, which are more attractive after the recent losses as the economic environment stabilises.
The recent correction in agriculture prices relates to trade war concerns rather than fundamentals, so we remain positive.
Strong US growth and political risks have fuelled the recent dollar rally, pushing the US dollar to near-expensive levels again.
Internal turmoil for the UK government keeps us negative, even as data has improved.
European political risks and the soft patch in eurozone economic data in the first half of the year have been mostly priced in.
We see the yen continuing to stabilise as the Japanese economy improves and the Bank of Japan reduces bond purchases.
We stay neutral on the Swiss franc.
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