Snapshot - Economics
Our multi-asset views for February 2019
In this month's multi-asset views we discuss the potential for modest gains in risk assets, while remaining mindful that economic growth is weakening.
25 February 2019
The improvement in investor sentiment, following the Federal Reserve’s (Fed) recent indications that it will not raise interest rates as fast as thought, is supportive of equities. However, we still expect equities to trade within a range, with heightened volatility.
Weaker economic growth supports bonds overall, despite some expensive valuations. Our score remains neutral.
Gold should benefit from lower interest rates, while energy remains volatile.
January saw an unusually strong and uniform rally across the corporate bond market. Continued policy tightening has seen most credit categories recover significantly from their lows at the start of the year.
With the recent change in the Fed’s policy stance, worries over “recession in 2020” have softened and are likely to support investor sentiment in coming weeks, but questions over the outlook for company earnings remain unanswered.
European equities appear cheap but this is warranted, in our view, given the political and economic challenges facing the region.
Downgraded, as UK equities are likely to see the support from a weaker sterling decline.
Japanese equities have underperformed global equities (in local currencies) recently, despite looking better value and stability in the country’s economic growth. Lack of confidence - particularly among international investors - remains a challenge and is likely to take time to resolve.
Asia would benefit if trade war tensions fade. However, many countries are seeing weakness in their housing markets with a knock-on economic impact.
Emerging markets (EM)
EM valuations (based on expected earnings) are now back down to 2015 levels after the large sell-off in 2018. The Fed’s pause in rate hikes and Chinese stimulus are likely to provide support, while investors await resolutions to US-China trade conflicts.
US bond yields look fairly priced after the recent change in Fed commentary.
The bond market is not pricing in enough hikes for the UK, in our view. There will possibly be a hike, as indicated by the Bank of England, if there is a Brexit resolution.
European economic data continues to disappoint, and our view is that German growth is being suppressed by fears of a European recession.
Japanese economic activity remains weak. These headwinds are also being reflected in Japanese earnings.
US inflation linked
We maintain the view that exposure to US inflation offers value.
Emerging markets local
We remain neutral. The Fed’s pause in rate hikes should hinder US dollar strength and selling pressure has waned; both of which are supportive. That said, valuations have already moved back to long-term averages.
Investment grade (IG) corporate bonds*
Spreads - the difference in yield between corporate bonds and government bonds - do not yet appear excessive when compared to historic highs. However, we remain concerned about the overall quality of US investment grade corporate bonds.
We are of the view that European investment grade corporate bonds short-term value, particularly should our core “muddle-through” scenario for the eurozone economy prove right.
Emerging markets USD
Following a challenging December, there were positive excess returns that may well continue in the near term given the accommodative backdrop.
* 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 yield bonds*
We think the US high yield corporate bond market looks stable for now, although expensive on a historical basis.
Despite recent inflows, it is too early to say whether this represents a sustainable trend, as this would require stabilisation in economic data and an improved political backdrop.
* 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.
The oil market in 2019 looks largely in balance but we expect heightened volatility.
Despite the equity market rally, gold has not given back the gains it made through the equity market tumble in December thanks to a dovish Fed and weaker US dollar (USD).
Industrial metals have limited upside unless China introduces large-scale fiscal initiatives.
Agriculture remains our preferred way to gain exposure to the political premium of US-China negotiations, supported by favourable valuations and weather risks.
We remain neutral on USD as both global and US growth are slowing down, causing the Fed to pause their hiking cycle and loosen liquidity conditions marginally.
The outlook is uncertain whilst awaiting the Brexit negotiations to be concluded; economic growth is slowing and that should increasingly weigh on the currency.
We see the euro staying range-bound, hemmed in by both the dovish Fed and the European Central Bank, which is turning less hawkish as economic growth weakens in the eurozone.
Japanese yen ¥
The Japanese yen remains an excellent hedge against slowing global growth. We expect the currency to strengthen as US bond yields decline in response to slowing US growth.
Swiss franc ₣
The Swiss franc (CHF) has weakened as risk conditions have improved.
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