Economics

Our multi-asset views for March 2019

In this month's multi-asset views we upgrade credit given more supportive central bank policies.

22 March 2019

Multi-Asset Investments

Key

Asset classes

 
 

Equities

With limited improvement in earnings revisions, we retain our neutral outlook, with a preference for emerging markets.

 

Government bonds

Valuations are expensive but the absence of inflation and soft economic data are supportive of bonds in a portfolio context.

 

Commodities

Overall we retain a neutral view, despite a weaker outlook for gold and agriculture.

 
 

Credit

While the continued rally has made valuations less appealing, supportive central bank policies and selective tactical opportunities have led us to upgrade credit.

 

Equities

 
 

US

With the Fed’s dovish stance, we have become less worried about the risk of recession. However, we would like to see a stabilisation in the earnings outlook before upgrading.

 

Europe

Earnings revisions have rebounded recently, but given the higher margin assumption embedded in the region’s earnings forecasts, we remain cautious.

 

UK

We believe that the recovery in sterling will remain a headwind for UK equities, specifically large cap stocks.

 

Japan

Japanese equities continue to underperform global equities despite more attractive valuations and stable economic growth. Lack of confidence continues to be a challenge.

 

Pacific ex-Japan

The region should benefit if trade tensions ease. However, sluggish growth and a weak housing market in Australia, which represents more than half of the index, is a headwind.

 

Emerging markets

There has been a sharp rebound in earnings revisions and attractive forward valuations. In China, easing trade conflicts and additional stimulus should bolster the market.

 

Government bonds

 
 

US

Looser policy is supportive, however, we see limited opportunity for further rate convergence between the US and the rest of the world.

 

UK

Binary risks associated with Brexit make it difficult to assess over the longer term.

 
 

Germany

We have upgraded our view on Bunds as a relatively steep yield curve, soft economic data and a dovish European Central Bank (ECB) increase their attractiveness.

 

Japan

With no significant changes in policy, we retain a neutral view.

 

US inflation linked

Still positive, but we have reduced our performance expectations this month.

 

Emerging markets local

Despite a more stable outlook, we expect only expect short dated bonds to perform.

 

Investment grade (IG) 1 corporate bonds

 
 

US

Spreads2 do not yet appear excessive when compared to recent historical highs (2011 and 2016), but we remain concerned about the deterioration of credit quality in the universe.

 
 

Europe

With spreads still attractive and an accommodative ECB, we moved to a positive view. We believe European investment grade spreads offer better short-term value, particularly should our core “muddle-through” scenario for the eurozone prove to be correct.

 

Emerging markets USD

Following a strong start to the year, and confirmation of accommodative central bank policy, the outlook remains moderately positive, particularly for higher quality EM credits.

 

1. 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).

2. 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.

High yield 3 credit

 
 
 

US

Spreads remain stable for now although expensive on a historical basis. However, strong levels of interest coverage and a benign backdrop support US high yield for the moment.

 
 

Europe

With challenging economic conditions and near-term political headwinds, the immediate outlook appears mixed. However, attractive valuations justify an upgrade to neutral.

 

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

We remain neutral, but recognise the increasing sensitivity of oil prices to OPEC cuts as US production plays an increasingly important role in global supply.

 
 

Gold

Downgraded due to increased risk of the US outperforming the rest of the world, which could result in a stronger dollar and reduced growth concerns.

 

Industrial metals

Industrial metals have limited upside unless China introduces large-scale fiscal initiatives.

 
 

Agriculture

Downgraded to neutral as the excessive build-up in inventories may outweigh any positive rebound from a trade deal. Additionally, the probability of weather disruption has fallen.

 

Currencies

 
 
 

US dollar

The dollar looks attractive as a hedge against the risk of a deterioration in global growth, particularly as activity indicators point toward potential US outperformance.

 

UK sterling

The outlook remains uncertain as Brexit negotiations intensify. Slowing economic growth remains a key headwind.

 

Euro €

We retain a neutral view on the euro, given the dovish stance of the ECB.

 
 

Japanese yen ¥

As a result of slowing growth and weak inflation, we have lost conviction in the Bank of Japan’s willingness to step back from accommodative policy.

 

Swiss franc ₣

The currency has weakened as risk conditions have improved. Our neutral view reflects the balance between weak growth fundamentals and its safe haven status.

 

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