Snapshot - Economics

Our multi-asset views for April 2019

This month we upgrade our view on equities following changes in central bank policy stances together with improvement in earnings revisions.

23 April 2019

Multi-Asset Investments

Key

Asset classes

 
 
 

Equities

We have upgraded our view following changes in central bank policy stances, together with further confirmation of improvement in earnings revision momentum.

 

Government bonds

Our neutral view remains unchanged as we still need rate sensitivity to balance risks in the portfolio.

 

Commodities

We remain neutral, driven by a flat macroeconomic backdrop that shows few signs of growth, yet provides sufficient resilience at this stage to avoid a full recession.

 

Credit

Credit continues to rally, following a strong start to the year. Year to date spread tightening 1 has been aided by an increasingly dovish stance by global central banks.

 

1. This refers to credit spreads, being the difference in yield between two different bonds that are the same in all aspects except for the credit rating.

Equities

 
 
 

US

Earnings revisions have stabilised and the rally has so far been under-owned, suggesting that the US equity market has further upside potential.

 

Europe

Cheap European valuations are warranted in light of political and cyclical challenges in the region. Economic activity indicators are a cause for concern.

 

UK

A stronger pound will provide a headwind for the UK market in the near term, specifically for large cap stocks.

 

Japan

We retain a neutral view while a lack of confidence continues to undermine stronger fundamentals.

 

Pacific ex-Japan

A weak domestic environment in Australia has a significant impact on the index and leaves us neutral, despite having a more positive view on Singapore and Hong Kong.

 

Emerging markets

We are seeing noticeable recoveries in momentum signals both on price and earnings revisions, particularly in China.

 

Government bonds

 
 
 

US

While looser policy remains supportive, the US 10-year has rallied with valuations pushed to extreme historical levels.

 

UK

We expect ongoing Brexit-related volatility to provide trading opportunities, but from a longer-term perspective we believe gilts are still rich compared to other markets.

 
 

Germany

We have moved to a neutral stance as we have taken profits following the fall in yields. We await better levels to re-establish positions.

 

Japan

The open-ended policy of yield curve control from the Bank of Japan will continue to put a ceiling on Japanese government bond yields in the medium term.

 

US inflation linked

We remain positive on US break-evens, which offer value against rising wages/inflation.

 

Emerging markets local

Despite a stable outlook, we expect future returns to be driven only by short dated bonds.

 

Investment grade (IG)2 corporate bonds

 
 

US

Deteriorating fundamentals alongside elevated valuations lead us to maintain our negative outlook for US investment grade.

 

Europe

The European credit backdrop is healthier, for now, with continued low interest rates and debt affordability for corporates looking set to improve even further.

 

Emerging markets USD

Accommodative policy in the US has removed the headwind to emerging market debt in the near term; however, unappealing valuations keep us neutral.

 

2. Investment grade bonds - 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 yield3 bonds

 
 
 

US

While comparatively expensive to history, US high yield spreads are stable, and strong interest coverage is supportive. Valuations drive our neutral score.

 
 

Europe

European high yield is trading at attractive levels relative both to history and fundamentals.

 

3. High yield bond - A speculative bond with a credit rating below investment grade. Generally, the higher the risk of default by the bond issuer, the greater the interest or coupon.

Commodities

 
 

Energy

Dampened global demand and tapered US production increases continue to offset a combination of OPEC+ cuts and sanctions applied to Venezuela.

 

Gold

Recession risk remains elevated, however, there is still an inherent possibility of a stronger US dollar as a result of US economic outperformance relative to the rest of the world.

 

Industrial metals

Industrial metals have traded broadly flat since being swept along in the January rally and there are no meaningful signs that this will change.

 

Agriculture

We feel the market is sufficiently well equipped on the supply side to deal with possible shocks from an El Niño weather event this summer or a US-China trade resolution.

 

Currencies

 
 

US dollar

We have a positive bias on the outlook for the dollar, and like it as a hedge against the risk of further economic weakness.

 
 

UK sterling

Upgraded, based on evident reluctance for a ‘no-deal’ Brexit, which should help sustain momentum in the labour market. We expect confidence to bounce back.

 

Euro €

We remain neutral with the ECB’s ultra-dovish stance, the uncertainty around Italian politics and the wait for a stabilisation in European growth still weighing on the euro.

 

Japanese yen ¥

Dovish comments from the Bank of Japan keep our view neutral. We may look to upgrade the JPY view if we believe the risk of global recession has risen.

 

Swiss franc ₣

We maintain neutral, reflecting the balance between weak fundamentals and the currency’s safe haven status.

 

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