Our multi-asset investment views - July 2020
Our multi-asset investment views - July 2020
MAIN ASSET CLASSES
We maintain our neutral view. The fundamental outlook is still weak but central bank support continues to be beneficial. The two-tier market within equities is likely to persist; this means we think we are likely to see “growth/quality” stocks continue to outperform those classified as “value”.
We believe that the upside to bonds is limited, but it does not make sense to reduce our exposure given our holdings in riskier assets.
We remain positive on commodities as prices continue to move slowly higher as global economic activity begins to return to normal. The energy sector has been leading the price recovery.
Whilst the fundamental picture remains weak, central bank support and robust investor demand will continue to support credit going forward.
With levels pricing in a “V-shaped” economic recovery, valuations have little room for manoeuvre if the recovery is slower than expected. We see more attractive opportunities elsewhere.
With Brexit still unresolved and the lockdown continuing to hurt economic activity, we see few encouraging signs in the UK equity market.
Europe remains our preferred developed market. Lockdowns are easing and we have seen a credible and coordinated response from the authorities.
Having done a comparatively good job in containing the spread of Covid-19 and with demand starting to pick up, there remains upside potential for Japan.
The region has been supported by fiscal and monetary policy and has weathered the Covid-19 fallout much better.
We maintain our neutral view, but have upgraded China with the recovery progressing unabated and the market overlooking trade war risk.
Although we are concerned that the efficacy of government bonds as a hedge is deteriorating, we believe US government bonds can still be useful in portfolios given our riskier positions elsewhere.
Yields and fiscal dynamics remain unattractive.
We have a negative view on Germany, also due to unattractive yields and fiscal dynamics.
Our view remains unchanged due to continued expansionary monetary policy from the Bank of Japan.
US inflation linked bonds
Inflation expectations remain depressed. It is too early to be concerned about the risk of significant rises, but markets are unduly pessimistic about the medium-term outlook.
Emerging markets local currency bonds
We maintain our positive stance to benefit from looser monetary policy in the emerging world as well as taking advantage of cheap valuations in emerging currencies.
Investment grade credit
We remain positive on US investment grade (IG) credit, driven by the Federal Reserve’s liquidity injections and financing programmes.
We believe support measures from the European Central Bank will strengthen the European corporate bond market.
Emerging markets USD
With the recent tightening of spreads, we continue to favour local currency debt over dollar denominated, where we see better credit quality (issuing companies’ ability to pay back their debt).
High yield bonds (non-investment grade)
Our bias is for the US over Europe, as US policy initiatives continue to underpin the high yield (HY, meaning non-investment grade)market.
Our view on European HY credit is unchanged due to stimulus through the expansion of the Pandemic Emergency Purchase Programme and the European Recovery Fund.
As lockdowns continue to ease, demand for energy is returning. The production cuts agreed by the Organisation of the Petroleum Exporting Countries (OPEC) continue to support the recovery in energy prices.
Whilst gold has performed strongly, we believe that there is the potential for further gains as gold is one of the main beneficiaries of central bank support measures.
The disruption to supply and the lack of scrap metal availability added to the recent rally in industrial metals. However, activity in areas such as copper are returning to pre-Covid 19 levels.
Prices remain attractive as the agriculture market has been a laggard in the economic recovery rally this year. The US-China trade deal is also likely to provide further support.
Downgraded as Covid-19 infection rates in the US have spiked significantly, compounding the weak growth outlook. We believe the US will underperform the rest of the world.
The economic impact of Covid-19 in combination with the risk of Brexit will continue to weigh on the performance of pound sterling.
We expect to see further upside following the monetary and fiscal support measures announced by the European Central Bank to boost economic recovery in the eurozone.
The stimulus packages announced by the Bank of Japan should support the currency as the coronavirus lending programme was increased to more than $1 trillion.
Swiss franc ₣
We remain neutral on the Swiss franc given its high price, whilst acknowledging its continued role as a perceived “safe haven” currency.
Source: Schroders, July 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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