Our multi-asset investment views - May 2020
Our multi-asset investment views - May 2020
MAIN ASSET CLASSES
We remain concerned over how long the recent strong rise in the prices of equities (shares) might last. We have seen worsening economic data, as well as renewed US-China tensions and there could be lower investor interest at these price levels.
With prices remaining at historically high levels, government bonds have become less effective as a ‘protection position’ (lower risk investment) in our portfolios.
The technical fundamentals, such as prices, are slowly improving and, as a result, we are seeing a more attractive risk-reward trade off. However, growth concerns continue to linger.
We remain positive on corporate bonds overall, as central banks’ monetary policy to support economies look set to remain in place for the foreseeable future.
We see an ongoing preference for high quality and growth shares in the US. This should see the US continue to outperform the rest of the world’s equity markets.
We remain negative on UK equities as continued price weakness caused by the lockdown measures adds to renewed concerns over a no-deal Brexit.
A lack of agreement on fiscal issues – and limited potential for further action by the European Central Bank (ECB) – is challenging for a region deeply affected by lockdown.
Concerns about supply chain disruption and reliance on global trade makes Japanese equities particularly unattractive.
Although activity is gradually improving with support from central banks and governments, fresh trade tensions mean there is increased risk on the downside.
We still prefer the growth potential and cheaper share prices in EM, and continue to favour Asia over EMEA (Europe, Middle East and Africa) and Latin America.
Given the low level of yields, the effectiveness of US bonds as a hedge (an investment position in a related asset class intended to reduce the risk of adverse price movements) in our portfolios has deteriorated. The limits of conventional monetary policy appear to have been exhausted for now.
We have downgraded our view, expecting UK government bond yields to be largely range bound and to provide a less effective hedge for portfolios.
The low relative yields on offer in Germany mean we continue to avoid the region. There remains limited upside from this point forward.
The Bank of Japan will continue to expand monetary policy as the government tries to spend its way out of the economic pain caused by the virus.
US inflation linked
Inflation fundamentals remain challenged, particularly with respect to the US unemployment rate and the fall in the oil price.
Emerging markets local
We have upgraded our view given compelling valuations, particularly in longer maturity bonds. EM inflation also remains on a downward trend, which should support prices.
Investment grade credit
Despite recent spread contraction (e.g. a smaller difference between the rates on government bonds versus corporate bonds), prices remain attractive. The Federal Reserve’s (Fed) support - it has moved to buy these bonds - will be of continuing benefit.
Although we still prefer US investment grade (IG) corporate bonds, we expect the support which is helping to prop up the market to remain in place for the foreseeable future.
Emerging markets USD
Despite a weak fundamental outlook, EM sovereign bond prices remain attractive. We also retain a positive view on EM corporate bonds.
High yield bonds (non-investment grade)
While US central bank policy initiatives will continue to support High yield (HY) corporate bonds, we have downgraded our view to reflect less extreme prices.
The increasing tension between the ECB and EU member states is likely to depress prices of European HY bonds, at a time when company fundamentals are deteriorating sharply.
Less surplus oil and continued low energy prices have led to a better risk / reward trade-off for investors. There are also early signs of a gradual rebound in demand in Asia.
Central banks will likely remain dovish, accommodative and provide ample liquidity where necessary. As a result, gold could continue to accelerate from these levels.
The fall in metal prices has run its course as global lockdown measures have hit supply alongside demand. However, the slow return to more normal economic conditions is set to depress demand growth.
Agriculture markets have levelled out for the time being. We remain aware of the backdrop of weaker economic demand and the re-emergence of US-China trade tensions.
The weak global growth outlook should support dollar strength. However, the Fed’s liquidity measures and the high US dollar price mean we remain neutral.
Despite the return of potential Brexit risk, we remain positive on sterling, given the UK’s united fiscal and monetary policy response to the virus.
The outlook for the euro remains weak given the inability of the ECB and fiscal policy makers to introduce a collective economic response to Covid-19. Tensions among EU member states are also a concern.
There are competing forces between the market optimism surrounding Covid-19 and the increasingly poor economic outlook.
Swiss franc ₣
We remain neutral on the Swiss franc given its high price, while acknowledging its continued role as a ‘safe haven’ currency.
Source: Schroders, May 2020. 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.
Please note any past performance mentioned is not a guide to future performance and may not be repeated. The sectors, securities, regions and countries shown are for illustrative purposes only and are not to be considered a recommendation to buy or sell.
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