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Snapshot - Markets

Our multi-asset investment views - May 2019

We have downgraded equities this month and upgraded government bonds and gold. Here's why.

24/05/2019

Multi-Asset Investments

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Key

Asset classes

 
 
 

Equities

We expect equities to deliver a small positive return over cash, given our view that a slowing macro environment may offer only modest support for equity markets.

 
 

Government bonds

We upgraded from neutral to positive this month off the back of positive momentum within the asset class.

 

Commodities

We remain neutral, driven by a flat macroeconomic backdrop that shows few signs of growth, yet provides sufficient resilience at this stage to avoid a full recession.

 

Credit

Credit continues to rally, following a strong start to the year. Year to date spread tightening has been aided by an increasingly dovish stance by global central banks.

 

Equities

 
 

US

We continue to favour US equities because of their quality earnings.

 
 

Europe

Upgraded as both earnings and sales results have improved since the last quarter, which were very muted compared to recent history.

 

UK

A stronger pound will provide a headwind for the UK market in the near term, specifically for large cap stocks.

 

Japan

We retain a neutral view, with a lack of confidence continuing to undermine stronger fundamentals.

 

Pacific ex-Japan

A weak domestic environment in Australia significantly impacts the regional index and makes us neutral, despite our more positive view on Singapore and Hong Kong.

 

Emerging markets

We continue to have a positive view on the region for its higher growth potential. China is currently benefitting from a series of domestically focused mini-stimuli gaining traction, but the spillover benefits to other countries remains questionable.

 

Government bonds

 
 
 

US

The upgrade is driven by the weakening cyclical outlook based on our models, and the recent escalation in trade wars between the US and China.

 
 

UK

Gilts should provide protection if equities sell off following their YTD rally.

 
 

Germany

Upgraded as the yield curve is steeper in Germany than in the US, meaning the carry is higher and more attractive.

 

Japan

The open-ended policy of yield curve control from the Bank of Japan will continue to put a ceiling on Japanese government bond yields in the medium term.

 

US inflation linked

We remain positive on US break-evens, which offer value against rising wages/inflation.

 

Emerging markets local

Despite a stable outlook, we expect future returns to be driven only by short-dated bonds.

 

Investment grade (IG) corporate bonds

 
 

US

A less favourable earnings backdrop alongside elevated valuations lead us to maintain our negative outlook for US investment grade.

 

Europe

The European credit backdrop is healthy for now, with continued low interest rates and debt affordability for corporates looking set to improve even further.

 

Emerging markets USD

Accommodative policy in the US has removed the headwind to emerging market debt in the near term; however, unappealing valuations keep us neutral.

 

High yield bonds

 
 

US

While comparatively expensive to history, US high yield spreads are stable, and strong interest coverage is supportive. Valuations drive our neutral score.

 

Europe

European high yield is trading at attractive levels relative both to history and fundamentals.

 

Commodities

 
 

Energy

Remain neutral as energy markets appear balanced after the Saudi commitment to fill the gap created by Iranian sanctions.

 
 

Gold

Upgraded to positive based on potential growth disappointment.

 

Industrial metals

Continue to trade broadly flat since being swept along in the January rally and there are no meaningful signs that this will change.

 
 

Agriculture

Downgraded to negative on the back of strong harvests in South America (coupled with existing high stock levels) and weakening prospects for the US-China deal.

 

Currencies

 
 
 

US dollar

The US dollar is expected to remain firm in the near term but to weaken later in the year as rates peak in the US.

 

UK sterling

Sterling has been boosted by the assumption that the economy enters a transition period rather than crashing out of the EU.

 

Euro €

Remain neutral with the European Central Bank’s ultra-dovish stance, the uncertainty around Italian politics and the wait for a stabilisation in European growth all still weighing on the euro.

 

Japanese yen ¥

Dovish comments from the Bank of Japan keep our view neutral. We may look to upgrade the JPY view if we believe the risk of global recession has risen.

 

Swiss franc ₣

We maintain neutral, reflecting the balance between weak fundamentals and the currency's safe haven status.