Our multi-asset views for December 2018
In our latest monthly update we discuss rising market volatility, our upgrade to gold and bonds as a diversifier.
28 December 2018
Our models suggest equities valuations have become more reasonable after the recent market falls. However, some caution is warranted. Improving (lower) valuations often come with increasing volatility1.
The economic picture has deteriorated amid disappointing data, but we think that government bonds have rallied too far, leaving valuations expensive.
We like gold as a hedge against further economic weakness.
November saw corporate bonds underperform government bonds across sectors in all regions, continuing a pattern of weakness in credit for the year to date.
1. A statistical measure of the fluctuations of a security's price. It can also be used to describe fluctuations in a particular market. High volatility is an indication of higher risk.↩
2. 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.↩
3. An asset class which encompasses a broad range of physical assets including oil and gas, metals and agricultural produce↩
4. A corporate bond, or a bond issued by a company↩
Although company earnings expectations have deteriorated, we think earnings and revenue growth for next year are still supportive of the region.
With the US dollar lower this month, a resulting stronger euro may become a headwind for European equities. The region’s political and economic climate remains fragile.
We remain slightly cautious on UK equities.
Productivity is improving, deflation may be over and private company investment (capex) is rising, so we believe Japanese equities offer an attractive proposition.
Ongoing trade war developments, together with some country-specific issues pose a threat to profits, but as valuations become more attractive, we keep a neutral stance.
Valuations are, in our view, attractive following the significant sell-off so far this year. A more stable dollar could be a catalyst for stronger EM earnings.
We still believe US government bonds (Treasuries) can be a useful diversifier against an economic slowdown.
Brexit uncertainty means the range of possible outcomes is still very wide – the Bank of England could be hiking or cutting interest rates next year.
Whilst valuations look high, we believe investors will likely continue to own German government bond (Bunds), thus tempering any negative view.
Mixed growth data amid the absence of significant inflation pressures will likely leave the Bank of Japan on hold for some time. Japanese government bond yields are in the middle of the Bank of Japan’s target range.
US inflation linked
We are now neutral on US inflation, as a lower oil price weighs against the effects of policy tightening.
Emerging markets local
The headwind of a slower economy continue to prevent us from taking advantage of the improvement in local market valuations..
Investment grade (IG) corporate bonds5
US IG corporate bonds
Fundamentals6 are continuing to weaken and the relatively low quality composition of the market makes it vulnerable to further spread widening.
European IG corporate bonds
Fundamentals have been relatively strong but the region remains buffeted by political and trade headwinds, weighing on expected earnings at a time when the level of bond supply is a concern..
Emerging markets USD
We believe that the regional mix and underlying path of earnings marginally favours investment grade emerging market corporate bonds over their high yield counterparts.
5. 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).↩
6. “Fundamentals” refers to basic facts and figures that give an investment professional a sense of a company’s overall stability↩
High yield bonds
We expect the excessive level of bond supply may worsen in US high yield and maintain our view that it is overpriced and vulnerable.
The European high yield bond market is due a readjustment we believe, from what remain extraordinarily low levels of yield (high prices).
Without oil production cuts or unpredictable supply shocks (e.g. Iran, Libya and Venezuela), supply and demand looks well balanced.
Gold continues to show safe-haven characteristics as equity volatility rises and bond yields fall, but any further strength in the US dollar remains a headwind.
Investors remain cautious; awaiting concrete evidence of progress in the US China trade dispute and news of Chinese infrastructure stimulus (and more stable growth).
We remain positive, given attractive fundamentals and scope for further recovery should trade war resolutions materialise.
We expect softer US activity to translate into lower interest rates, providing an important boost to borrowing for the rest of the world and a softer dollar.
The Prime Minister winning her no-confidence vote means the odds of “no-deal” Brexit have fallen. We would need parliament approval / a second referendum to add to sterling.
Upgraded on expectations of a softer/flattish USD, as well as some tentative signs of economic recovery.
Japanese yen ¥
We were too optimistic on the yen, given that valuation is not at extremes. Continue to expect monetary policy convergence to drive JPY next year.
Swiss franc ₣
We expect the Swiss National Bank Governing Board to leave rates unchanged, only raising interest rates when euro-area policy makers begin to hike.
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