Our multi-asset investment views - March 2021
Our multi-asset investment views - March 2021
MAIN ASSET CLASSES
We believe in the fundamentals of equities over the medium-term. We recognise, however, the risk that rising real rates pose to equity valuations, given they are a key component of the discount rate for calculating today’s value of companies’ future cashflows.
Yields have risen sharply since January. The global impact of the vaccine roll-out and the US fiscal package, however, mean there is still some scope for further modest rises (bond prices fall as yields rise).
We remain positive as commodity prices continue to rise. Vaccine distribution and solid hopes of additional fiscal stimulus are driving the recovery in demand.
The probability of a vaccine-led recovery in the second quarter of 2021 continues to have positive implications for credit, but we continue to see little value.
The risk-return profile has deteriorated with rising real yields pressuring the technology/growth heavy market. We continue to favour economically sensitive sectors within the US.
The UK is attractive given its economic sensitivity and cheap valuations. The strength of the pound, however, is weighing on a market with high foreign revenues.
The region is well positioned to benefit from any normalisation of the global recovery but is behind on vaccine delivery. Fiscal support also remains as a headwind.
We still expect the country’s export sectors to benefit from the economic recovery.
We continue to favour these markets, particularly Korea and Taiwan, given signs of recovering exports and ongoing support from the technology cycle.
We remain positive on emerging market (EM) equities where the growth exposure in the index is diversifying to our other positions.
Sentiment has shifted towards higher US yields since January’s Senate run-off elections and the approval of the legislation for further significant fiscal stimulus.
We have reduced our negative score on the UK market following a poor start to 2021 with valuations now more attractive.
Similarly, to the UK, we have reduced our negative score as valuations have improved. We acknowledge the German market remains challenged given negative real yields.
We remain negative on Japanese bonds as they continue to offer no value in a portfolio context.
US inflation linked bonds
The yield difference between nominal and inflation-linked US government bonds (breakeven rates) have normalised. We remain positive as they offer “protection” against any upside inflation surprises that may emerge later in the year.
Emerging markets local currency bonds
We prefer EM Asia where inflationary pressures are more muted. Overall, we have downgraded as the rest of the EM universe does not look particularly attractive.
Investment grade credit
We have downgraded our score, due to very tight valuations in the US investment grade sector, together with less supportive technical factors.
We remain positive. Technical factors and fundamentals are more supportive compared to the US market.
Emerging markets USD
We have taken the opportunity to downgrade EM corporate investment grade credit following recent tightening in credit spreads. 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.
High yield bonds (non-investment grade)
Fundamentals remain weaker than Europe, but a strong vaccine rollout should help, and lending conditions have also improved versus Europe.
We remain concerned about the lack of a co-ordinated recovery programme and, should banks continue to tighten lending criteria, rising insolvency risk.
We have upgraded our view as OPEC+ – an alliance between OPEC members (Organization of the Petroleum Exporting Countries) and other oil producing states – surprised the market this month by keeping supply steady. Saudi Arabia also continues its voluntary cut.
We continue to remain on the sidelines for now. We believe gold is oversold and await the Federal Reserve’s (Fed) intervention to cap yields.
Weakening credit growth and survey data from China are concerning, but ex-China demand should recover strongly as global activity normalises, driving prices higher.
We upgraded as 40% of US corn is used in the production of ethanol, where demand is expected to rebound strongly as the world reopens. Chinese soybean orders are also up threefold from last year.
Our view is based on the dollar offering diversification, US growth momentum outpacing other developed markets, and an earlier pick-up in US inflation and yield differentials.
Economic data continues to disappoint, but a strong vaccine rollout programme could offer some hope for sterling outperformance.
We see signs of European Central Bank dovishness compared to the Fed’s comfort with higher yields. We expect the growth differential will widen following Europe’s lacklustre vaccine progress.
Our negative view on the Japanese yen continues to reflect the better vaccine story, higher growth, inflation and interest rate outlook for the US. In addition, it reflects the positive yield differential of the US dollar versus the yen.
Swiss franc ₣
The Swiss franc is under pressure from a stronger US dollar. It remains attractive, however, versus the euro given the risks from the slowness of the European vaccine rollout.
Source: Schroders, February 2021. 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.
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.