Our multi-asset investment views - January 2022
Our multi-asset investment views - January 2022
MAIN ASSET CLASSES
The news on the Omicron variant has improved, but the Federal Reserve (Fed) is back in play. Whilst we remain invested for now, it remains to be seen how aggressive the Fed will be in combating rising inflation.
Despite the recent sell-off, valuations are still somewhat expensive relative to our models. Hawkish rhetoric by central banks solidifies our conviction on imminent tightening.
The market has rebounded strongly as cyclical sectors outperformed. We stay positive as the balance remains tight with economies re-opening, but supplies restrained.
Fundamentals continue to improve, and we expect this to persist, translating into relatively low default projections in developed markets.
We continue to favour the US given the strength of the recovery, however we are less positive on US technology stocks given sensitivity to rising yields.
It remains to be seen whether the UK equity market can outperform alongside strength in the British pound.
We remain on the sidelines for now, as the region continues to suffer from subdued activity due to the impacts of Omicron.
We expect market gyrations to continue to be driven by currency movements, with a weakening Japanese yen recently propping up the market. The response to Omicron will be key.
Global Emerging Markets1
China’s easing stance and cheap valuations outside Asia are supportive, but we remain cognisant of a “hawkish” Fed and a potentially stronger US dollar. Monetary policymakers are often described as hawkish when expressing concerns about limiting inflation.
Authorities have begun to ease policy and stimulate selective parts of the economy. Despite this, markets will continue to be volatile and we remain neutral for now.
EM Asia ex China
Supply side bottlenecks have begun to abate, but uncertainties persist, including the upcoming Korean elections.
We expect the US yield curve to flatten and shift higher in time, driven by a maturing economic cycle and monetary policy normalisation. Valuations remain off our fair value estimation. Monetary policy covers measures taken by central banks designed to stimulate economies. Normalisation refers to interest rates being raised back to where they broadly were prior to Covid-19 and the phasing out of other policies implemented during the pandemic.
Gilt yields have moved up significantly in recent weeks as investors have bet on more interest rate rises against a backdrop of rising inflation. Upgrading on valuation grounds.
With German bund yields recently returning to pre-pandemic levels, we have reduced the magnitude of our underweight. This comes despite a continued monetary divergence between the European Central Bank (ECB) and the Fed.
We remain on the sidelines in Japan with little movement expected anytime soon.
US inflation linked bonds
Leading indicators remain in expansion, inflation and growth data remain elevated, but momentum is slowing. With Omicron concerns fading, our medium-term view of higher inflationary pressures remains unchanged.
Emerging markets local currency bonds
Valuations and carry are compelling in local emerging market debt (EMD), with the emerging markets (EM) versus developed market yield differential trading at its highest levels since the global financial crisis. Many EM countries are also further along the path of monetary normalisation.
Investment grade credit
We expect stability or a slight drift wider in US IG credit spreads. Increased mergers and acquisitions (M&A) activity and leverage buy-out activity are likely to be factors that increase supply going forward. The credit spread is the margin that a company issuing a bond has to pay an investor in excess of government yields and is a measure of how risky the market perceives the borrower to be.
European investment grade bonds still has scope to tighten a little further, particularly following the European Central Bank (ECB) meeting in December, which confirmed an expansion of the asset purchase programme.
Emerging markets USD
EM corporates continue to look attractive, but policy measures in China still need to be accelerated to boost sentiment. We also see value in the sovereign space.
High yield bonds (non-investment grade)
Whilst we retain a preference for high yield across developed markets, valuations and higher future supply restrict our enthusiasm for the US.
European high yield bonds offers slightly more compelling valuations, with potential upside driven by the continued divergence in policy support between the ECB and the Fed.
Given the continued recovery and limited damage from the Omicron variant, demand remains strong and the deficit continues to bring inventories down further.
Whilst we remain neutral, gold appears better priced against real (adjusted for inflation) yields, which may be attractive if we have reached peak Fed hawkishness.
Ex-China demand is continuing to rise, while the policy stance in China turns more supportive. The focus on renewable energy also brings substantial long-term upside.
There remains some upside risk from rising input costs, most notably in fertiliser prices, as the knock-on effect may results in a decrease in expected supply in 2022/23.
We hold less conviction in the dollar’s upward trend. The Fed appears to have reached maximum hawkishness with significant tapering and rate hikes already priced in.
The market is pricing in a more aggressive stance from the Bank of England, however recent data shows UK growth may already be slowing.
With the Omicron threat fading and monetary divergence with the Fed priced in, we have upgraded the euro to neutral. Given recent developments, valuations appear mis-priced.
We expect a slowdown in exports and interest rate cuts to lead to a depreciation in the renminbi (offshore), something now being flagged by policymakers.
Intensifying US rate hike expectations and fiscal stimulus in Japan should lead to a further leg down in the Japanese yen. Fiscal stimulus involves government spending and taxation policies designed to support economies over the short term.
Swiss franc ₣
Swiss franc rates are expected to continue to be even lower than Europe and as the Fed starts hiking, the low carry just becomes less appealing.
1 Global Emerging Markets includes Central and Eastern Europe, Latin America and Asia.
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