Our multi-asset investment views – September 2019
Although government bond yields have risen recently, we continue to see evidence of weakness in the global manufacturing cycle and central bank liquidity has pushed markets to ever more expensive levels. Looking across the world we find that these trends are at their most extreme in Europe, as growth here is at its most anaemic and the consequences of central bank policy for the bond markets have been most pronounced.
Accordingly, we have taken some profits on European high yield debt, German government debt and our short euro positions. We continue to like carry strategies in US high yield debt, US investment grade debt and currency. We also use US duration and gold as a hedge against growth disappointment, while long US dollar positions act as a hedge against disappointment on the liquidity front.
With regard to equities, the cyclical picture and its potential repercussions for US earnings in 2020 cloud the horizon, but we remain invested for now due to low interest rates.
An improvement in the trade war rhetoric is still a potential wildcard. Central bankers (European Central Bank, ECB) are now messaging that we have reached the limits of monetary policy. It is therefore also possible that governments move to a more forceful fiscal response but we believe this will take some time. As a consequence, we continue to tread a careful line between benefiting from the liquidity environment without taking too much cyclical risk.
Main asset classes
Remain neutral on equities, with liquidity conditions and low rates providing a cushion against a soft cyclical backdrop and geopolitical volatility.
Valuations are becoming increasingly stretched, however strengthening momentum and soft cyclical indicators mean we keep bonds as defensive positions in portfolios.
Remain neutral overall on commodities, with negative carry, weakening momentum and a deteriorating cyclical backdrop offset by our positive view on gold as a hedge against increased liquidity and geopolitical risks.
With spreads marginally widening in August, dovish central bank language, and demand likely to remain supportive, we retain our positive view.
Valuation is moderately expensive but not at an alarming level. Earnings downgrades are showing signs of stabilisation.
Uncertainties around policy direction including the risk of “hard Brexit” continue to pose challenges for UK markets.
Consensus forecasts for 2019 earnings have been deteriorating sharply, led by worsening outlook for margins which has recently turned negative.
Export weakness and a strong yen continue to be a drag for equities.
Growth momentum in the region continues to be weak with expectations of further accommodative monetary policies baked in. The high dividend nature of the market is a positive, but lacklustre earnings prospects keep us neutral.
Renewed pressures from trade conflicts raise the risks for those markets with an export focus.
We remain positive on US government bonds as a hedge against growth disappointment and due to their higher yielding entry point on a globally relative basis.
Gilts could profit from further political uncertainty in the UK and in particular the lingering threat of a hard Brexit.
Despite an anaemic backdrop, we have downgraded bunds as valuations are trading at extreme levels and the ECB is indicating they have reached their limits on monetary policy.
Similar to Germany, the outlook remains anaemic, but due to more extreme rich valuations we turn neutral.
US inflation linked
We acknowledge the pickup in core CPI driven by tariff impacts, but remain neutral due to the growth outlook.
Emerging markets local
Downgraded to neutral following significant spread tightening and elevated cyclical risks.
We retain our positive view after a slight widening in spreads, given the unusually supportive demand backdrop.
Maintain at neutral. European investment grade increasingly suffers from negative yields and high levels of supply.
Emerging markets USD
Following a significant Argentina induced sell-off in August, we have upgraded emerging markets sovereign based on absolute and relative valuation levels.
Remain positive. Although concerns over fundamental credit quality remain, they are offset by supportive demand.
Fundamentals are weak and the sector has more ‘call risk’ than the market is currently pricing.
Following the recent oil price spike, the impact of mounting geopolitical tensions is offsetting the effects of weakening economic sentiment.
Gold continues to be supported by the provision of liquidity by central banks stemming from economic growth concerns, and increasing global geopolitical tensions.
With the upside capped by cyclical headwinds and downside limited by central bank dovishness and increased Chinese fiscal stimulus, we remain neutral.
Remain negative given uncertainty surrounding a trade war resolution, coupled with reasonable harvests despite bad weather earlier in the year and negative carry.
We like the US dollar as a hedge against disappointment in liquidity.
With the Bank of England continuing to push back against suggestions of future rate cuts, and the probability of a “no deal” all but priced in, we have upgraded sterling to neutral.
We remain neutral in light of increased stimulus from the ECB, but recognise potential for positive surprises, include ebbing Italian risk owing to a change in government, and increased talk of fiscal stimulus from Germany.
In the face of a slowing global economy and geopolitical risk, we remain positive on the yen given its safe haven status.
Swiss franc ₣
Recent CHF strength may lead the Swiss National Bank to lower rates in September, although we believe the intended impact of weakening the currency through cuts will be limited.
Source: Schroders, September 2019. 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 US dollar, apart from the US dollar which is relative to a trade-weighted basket.
Unstructured Learning Time
- How Europe's tech sector is hiding in plain sight
- The recent challenges of active equity investing – and why this might change
- Infographic: A snapshot of the world economy - 2019 in review
- Infographic: Sustainability Report Q4 2019
- Global Market Perspective - Q1 2020