Our multi-asset investment views - December 2019
Our cyclical models still suggest that we are in the slowdown phase of the cycle, which is typically challenging for equities. However, the significant loosening of monetary policy this year has helped to underpin market valuations as well as leading to some signs of cyclical stabilisation. We believe that the risk of global recession in 2020 is lower than it was 3-6 months ago; the imbalances which would trigger a downturn are absent whilst activity is gaining support from an easing in trade tensions and monetary policy. We therefore continue to be overweight equities with an emphasis on emerging equities and US small cap stocks.
We debated whether we could see a more vigorous economic recovery in 2020 which would justify a negative stance on rates, a weaker US dollar and a more value-oriented equity strategy. For now, we remain sceptical as we expect fiscal stimulus to be muted. A potential area of upside surprise could be the US consumer but we want to see tangible evidence on this front. As a consequence, we continue to see government bonds as a useful hedge against growth disappointment. This month we have rotated into US Treasury Inflation-Protected Securities (TIPS) as they offer some protection against a pick-up in inflation, and we continue to own gold. We have turned neutral on the US dollar as its positive carry characteristics are to some extent offset by its expensive valuation.
MAIN ASSET CLASSES
The recently announced phase one US-China trade deal is likely to support corporate profit margins, or at least push back some of the downward forecast revisions in coming weeks.
We remain neutral for now as duration still has a hedging role in a portfolio context. The cyclical models continue to point to a slowdown;, however, the global economy has shown signs of stabilisation in recent months which has resulted in yields moving higher off their recent lows.
We retain our positive view as cyclical indicators continue to fall and global liquidity conditions remain abundant.
We remain positive in the absence of material changes over the month. The backdrop for credit remains strong and appears likely to continue, given the broadly dovish orientation of the Federal Reserve (Fed), European Central Bank (ECB) and emerging market monetary policy.
The phase one US-China trade deal included some rollbacks of existing tariffs. This could significantly reduce the risk of earnings downgrades as we enter 2020.
We expect muted growth in 2020 as uncertainties slowly dissipate - the Conservative majority should help encourage new investment but we have seen business confidence decline.
Recent economic indicators in Europe continue to suggest some stabilisation. The US-China trade deal may buoy equity markets going into 2020, or at the very least delay downward trending earnings forecasts.
Typical headwinds affecting the market continue to fade, while valuations remain attractive.
Growth momentum in the region continues to be weak and expectations of further accommodative monetary policies are priced in.
We remain positive as we see attractive valuations versus developed markets, as well as continued improvement in earnings revision momentum.
Downgrading as stronger outlook and ongoing stimulus is starting to impact domestic activity. We are already witnessing impacts from the Fed’s current low rates through the housing sector.
The Conservative majority should remove uncertainty around getting an EU withdrawal bill though parliament and encourage more spending, which is negative for gilts.
We retain our negative view as we expect real yields to rise on the expectation of a turnaround in economic data.
We continue to see some encouraging signs in exports and manufacturing activity.
US inflation linked
Remain positive due to improvements in the cyclical outlook and the Fed’s ongoing commitment to boost inflation.
Emerging markets local
Remain neutral, but acknowledge spreads have pushed back out to historically average levels. Higher carry should offset the pressure from higher global yields.
We continue to favour the US in light of strong technical data and a dovish Fed.
European investment grade increasingly suffers from negative yields and high levels of supply by foreign issuers looking to capitalize on cheaper financing costs.
Emerging markets USD
In emerging markets, we favour quality and we keep our positive view given the strong backdrop for demand and the broadly dovish orientation of EM monetary policy.
Remain positive due to the Fed’s dovish stance, better-than-expected earnings and supply not growing year to date.
Fundamentals are weak and there is more “call risk” (the risk that a bond issuer will redeem its bonds before they mature) than the market is currently pricing.
Energy remains volatile, with no overall strong directional momentum.
The slowdown phase and ongoing central bank liquidity should support gold prices
Price upside continues to be restrained by growth headwinds, with industrial metals giving up recent gains, though downside is limited by central bank dovishness.
We have retained our neutral view. Prices largely reflect the lacklustre outlook.
Downgraded as its positive carry characteristics are, to some extent, offset by its expensive valuation.
Following the post-election rally, we have downgraded as UK business confidence has been declining across the board, in contrast to the recovery in Europe.
Lower tensions in Italy and in the trade war between the US and China should improve risk sentiment towards Europe.
A slightly more stable global economy with reduced recession and geopolitical risk, combined with a stable Fed, warrants a neutral score on this safe haven currency.
Swiss franc ₣
Inflation numbers were worse than expected in October, with even core inflation falling. Switzerland is at risk of relapsing into deflation.