Snapshot - Markets
Our multi-asset investment views - November 2019
This month we upgraded equities to positive and downgraded bonds to neutral, reflecting our belief that recession risks have reduced.
Unstructured Learning Time
Our economic models still point to a weak growth environment. That said, we have seen a reduction in political risk associated with trade wars and a “no deal” Brexit, which reduces the risk of a global recession in 2020. This allows us to focus on the benefit of looser central bank policy.
Last month we increased our exposure to economic growth – cyclicality - via allocations to emerging equities and US small cap stocks. This month we upgraded equities to positive and downgraded bonds to neutral, reflecting our belief that recession risks have reduced. A positive view on equities also implies that corporate bond yields should fall (and prices rise), but we see more upside in equities than credit in the next few months.
However, we still see the upside for government bond yields as being capped. The market has discounted the potential for further Federal Reserve (Fed) rate cuts, and we see value in government bonds as a hedge against growth disappointment.
Similarly, although we have reduced our long US dollar (USD) position, we are still modestly overweight as a counterweight to our more cyclical positions.
MAIN ASSET CLASSES
Upgraded this month as we see more upside. Equities are attractive relative to bonds, with a preference for emerging markets and Japanese equities.
Downgraded as valuations remain negative, momentum has weakened and the Fed has signaled the intention to pause the easing cycle. We retain bonds in the portfolios as a hedge against a further deterioration in growth.
We retain our positive view as global liquidity conditions remain abundant.
Demand for credit remains strong and appears likely to continue, given the broadly dovish orientation of the Fed, European Central Bank (ECB) and emerging market monetary policy.
Unattractive valuations, coupled with optimistic earning expectations and the 2020 election risk, could prove to be headwinds.
Outlook is marginally more optimistic as the Bank of England continue to push back against suggestions of future rate cuts whilst the probability of a “no deal” Brexit seems remote.
Recent economic indicators in Europe suggest some stabilisation, whilst the forecast for 2020 earnings growth remains on a par with the rest of the world. The weakness in the euro will also provide support to export-driven sectors.
Valuations are more attractive than most other developed markets, whilst the typical headwinds for exporters - such as a strong yen - and the risk to domestic demand, post the consumption tax hike, are now reducing.
Growth momentum in the region continues to be weak and expectations of further accommodative monetary policies are priced in.
Attractive valuations, positive earnings revision and the weaker USD drive our upgrade.
Downgraded due to signs of easing geopolitical tensions, as the US and China agree the outline of a potential “mini” trade deal.
Risk of a “no deal” Brexit outcome has receded, however we remain concerned over the prospect for fiscal expansion following the outcome of the UK general election on 12 December.
Downgraded due to signs of stabilisation in the economic data and an indication that the ECB has reached its limits on monetary policy.
Downgraded due to a reduction in trade war risks and limits to monetary policy given yields are still trading negatively.
US inflation linked
Remain positive due to the impact of tariffs and after a lift in shorter-term core inflation (CPI).
Emerging markets local
Remain at neutral due to significant tightening of credit spreads and cyclical risks.
We continue to favour the US in light of strong technicals and a dovish Fed.
Maintain at neutral. European investment grade increasingly suffers from negative yields and high levels of supply.
Emerging markets USD
We retain our positive view, given the strong backdrop for demand remains 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.
The impact of potential geopolitical tensions offsets the effects of softening economic sentiment.
Cyclical models still point to slowdown. Gold continues to be supported by the provision of liquidity by central banks.
Price upside continues to be restrained by growth headwinds, while downside is limited by central bank dovishness.
Prices now largely reflect the lacklustre outlook. Inventory should remain elevated in 2020 and the US-China trade war show little signs of a long-term resolution.
We are awaiting signs of firmer global growth or stabilisation before further revising our view.
Pound (GBP) has gained to levels near the post-Brexit average; high frequency indicators indicate surprisingly weaker growth prospects so we will wait for GBP to price this in.
Mirroring the dollar view, we are more positive on the euro but need to see firmer signs of a recovery in European growth emerge after PMIs have troughed.
We have been removing yen positions as a hedge, but – as with the dollar view - we await signs of global growth recovery before changing our score.
Swiss franc ₣
The Swiss Franc is unlikely to move following its lack of any trend this year and as European growth signals have not been strong enough. The Swiss National Bank is likely to remain vigilant for signs of any strength.