Our multi-asset investment views - June 2021
Our multi-asset investment views - June 2021
MAIN ASSET CLASSES
Strong corporate earnings, continued policy support and low bond volatility reaffirm our positive view. We continue to have a tilt in favour of economically sensitive/lowly valued areas of the market.
Although valuations have slightly improved, we continue to believe break-even inflation rates will move higher and economic momentum will be a headwind. Break-even inflation rates are market-based measures of expected inflation.
Supplies remain under pressure as stocks have plummeted to decade lows. Vaccine distribution and fiscal stimulus continue to support the economic recovery. Fiscal stimulus is a tool used by policymakers in an attempt to manage economic fluctuations.
Valuations have increasingly become very expensive across developed markets while the outlook for technical factors appears less favourable going forward.
Corporate earnings continue to positively surprise while monetary stimulus (another tool used by policymakers in an attempt to manage economic fluctuations) remains supportive. Our preference is for economically sensitive/lowly valued over defensive/growth areas of the market.
The UK offers attractive exposure to the economic recovery and cheap valuations, but the strength of the pound still weighs on a market with high foreign revenues.
A strong rebound in the pace of vaccinations coupled with support by the European Central Bank (ECB) leads us to believe that Europe will benefit from an expected reopening.
Vaccine rollout is improving quickly, which is beneficial for this export-led market as we expect the economic recovery to continue.
We continue to favour Korea and Taiwan as their manufacturing outlook remains bright, with low semiconductor inventory and an environment of high global demand.
We upgraded our view due to relatively attractive valuations as the market begins to recover from the effects of the virus.
We remain negative as we believe we have not yet seen the ceiling for US yields. In addition, the risks of higher inflation remain elevated.
We downgraded our score for the UK as we expect inflation to gently trend upwards while the vaccine roll-out continues to progress rapidly.
A combination of poor returns versus cash and accelerating economic momentum leads us to believe German bonds will underperform.
Recent moves have been consistent with the rest of the bond market. There has been no change of view within a portfolio context.
US inflation linked bonds
We downgraded our view as our model suggests that the market is now fairly priced.
Emerging markets local currency bonds
Although the risk of US tapering (a reduction in the rate at which central banks buy assets such as bonds as part of quantitative easing programmes) remains a headwind, adjustments in Latin America have been material and the outlook for economic growth appears to be improving.
Investment grade credit
Valuations are extremely expensive, meaning the US investment grade (IG) credit market is particularly vulnerable to shifts in market sentiment and technical factors e.g. the risks from interest rate rises.
Despite stronger technicals underpinned by the ECB, credit spreads nonetheless remain tight and therefore valuations appear increasingly stretched.
Emerging markets USD
We maintain our positive view, but believe the key factors to monitor are any fiscal deterioration and the level of real interest rates, both of which are currently favourable.
High yield bonds (non-investment grade)
Despite an improvement in fundamentals, credit spreads remain compressed and so we retain our negative view as valuations are incredibly rich. The credit spread is the margin that a company issuing a bond has to pay an investor in excess of government yields and is a measure of how risky the market perceives the borrower to be.
While there is an acceleration in the vaccine roll-out, the lack of a coordinated fiscal recovery programme increases the possibility of higher future default rates.
We have moderated our view to reflect the extent of price rises so far. However, we remain positive as demand remains strong while global inventories continue to be drawn down as the market remains in deficit.
Following the recent rebound in gold prices, the gap between gold and real yields has narrowed. In addition, the risk/return ratio appears less favourable.
Despite a moderation in demand in China, demand in the rest of the world appears to be picking up as economic activity begins to normalise following the vaccine roll-out.
Supply is under pressure amid strong global demand and weather disruptions. However, planting is ahead of schedule and we expect supplies to improve by the third quarter.
Despite the swifter post-Covid recovery in the US, we have tactically downgraded our view. We expect currencies outside of the US to catch up over the summer as vaccination rates increase.
The vaccine roll-out coupled with the anticipated removal of further restrictions has been positive; however, recent appreciation means the currency is now broadly fairly valued.
Although vaccine progress could lead to a strong bounce in Q2, we remain neutral while we await a growth catalyst in the coming months.
This score continues to reflect the US’s better vaccine story, higher growth, inflation and interest rate outlook, along with the positive yield differential of the US dollar versus JPY.
Swiss franc ₣
Still negative as the franc’s defensive characteristics means it will be unlikely to outperform other currencies in an environment of recovering global growth.
The views and opinions contained herein are those of Schroders’ investment teams and/or Economics Group, and do not necessarily represent Schroder Investment Management North America Inc.’s house views. These views are subject to change. This information is intended to be for information purposes only and it is not intended as promotional material in any respect.