Our multi-asset investment views - February 2023

🟢 Long / positive

🟡 Neutral

🔴 Short / negative

🔼 Up from last month

🔽 Down from last month

Main Asset Classes

🟡 Equities

We keep our neutral stance. Peaking interest rates take some pressure off valuations, but risks of a hard landing or persistent core inflation remain.

🟢 Government bonds

We remain positive - data such as credit conditions suggest higher rates are starting to impact growth and as the Fed remains vigilant on inflation.

🟡 Commodities

A slowdown in global growth, combined with easing supply dynamics, present limited upside across most commodities.

🟡 🔽 Credit

After significant tightening of spreads, we are moving to neutral on credit.

Equities

🔴 US

While the US economy is proving remarkably resilient, we have strong doubts that current valuation levels are justified especially if growth slows.

🟡 UK

Domestic issues are aplenty, but we remain neutral on valuation grounds.

🟢 Europe

Valuations are appealing, corporate balance sheets are strong, and we expect China’s relaxation of its zero-Covid policy to boost growth.

🟡 Japan

The region should benefit from China’s reopening, accompanied by attractive valuations. However, projected yen strength may prove a headwind.

🟢 Global Emerging Markets¹

Recessionary risks are traditionally not supportive for emerging markets. However, current valuations reflect this, and China’s re-opening should help.

🟢 Asia ex-Japan, China

China’s reopening has been far quicker than most expected. Better growth trends versus the US and lower valuations keep us positive.

🔴 🔽 EM Asia ex China

We have downgraded. Recent quarterly profits posted for companies such as Samsung have been dire, plunging to their lowest level in years, leaving us concerned.

Government bonds

🟢 US

Market concerns will likely shift towards issues surrounding slower future growth given that the disinflationary process has begun.

🟡 UK

Although recent comments indicate a more balanced tone and reflect that the terminal rate is now in sight, we remain neutral as inflation risks persist.

🟡 Germany

We remain neutral as it remains unclear how high the European Central Bank (ECB) will raise interest rates given that growth has been higher than expected and inflation data has been lower than expected.

🟡 Japan

Further policy changes in yield curve control operations are expected. Absolute yields are still unattractive compared to other markets leaving us neutral.

🟡 US inflation linked bonds

We remain neutral. Even though we favour the US bond market, we prefer to take exposure through nominal bonds as we expect inflation to continue to fall.

🟢 Emerging markets local currency bonds

We remain positive on local EM debt given that the carry (the difference between the yield on a longer-maturity bond and the cost of borrowing) is still attractive.

Investment grade credit

🔴 🔽 US

Valuations in the US are expensive if we are heading into a slowdown and possibly a recession. Recession risks place a floor on spreads.

🟡 🔽 Europe

After a significant tightening of spreads, we are taking profits on our overweight position and moving to neutral.

🟢 Emerging markets USD

We remain positive as emerging market fundamentals look relatively strong

High yield bonds (non-investment grade)

🔴 US

The relative size of the US loans market makes the sector vulnerable in the event of a sharp downturn in the US economy.

🟡 🔽 Europe

We have downgraded on valuation grounds but recognise that in comparison to the US, European HY spreads trade slightly wider.

Commodities

🟡 Energy

The oil market has been flat as it digests the China reopening story. Gas prices have plummeted thanks to a mild winter and an uptick in supply. We believe weakening demand should continue to dictate the direction, offsetting any upside from China.

🟡 Gold

Weakening growth, an easing of inflation pressures and peaking real yields should support gold prices, but after recent price rises, we prefer to wait for better levels.

🟡 Industrial metals

China’s policy shift has caused a sentiment-driven rally in base metals. We need to see a recovery in more metals-sensitive sectors, most notably property, to justify higher prices.

🟡 Agriculture

Increasing supply from both Ukraine and Russia and favourable crop conditions continue to constrain the potential upside from agriculture.

Currencies

🔴 US $

We believe the dollar has peaked and the divergence in global central bank policy should put pressure on the currency to depreciate further.

🔴 UK £

We stay negative on the view that the UK’s growth woes will outweigh inflation concerns.

🟡 EU €

Although the region’s growth prospect appears slightly better than elsewhere, inflation slowed more than expected last month, meaning we retain our neutral view.

🟡 CNH ¥

Although positive moves on a China reopening should benefit the renminbi (offshore), as well as other Asia-focused currencies, we remain neutral.

🟢 JPY ¥

The recent move from the Bank of Japan (BoJ) may be the first of a series of monetary tightening moves, which would be supportive for the currency.

🟡 Swiss franc ₣

The Swiss franc should benefit from the same drivers that benefit the euro.

¹ Global Emerging Markets includes Central and Eastern Europe, Latin America and Asia.

Source: Schroders, February 2023. The views for equities, government bonds and commodities are based on return relative to cash in local currency. The views for corporate bonds and high yield are based on credit spreads (i.e., duration-hedged). The views for currencies are relative to the US dollar, apart from the US dollar which is relative to a trade-weighted basket.

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