Market Views: Multi-Asset

Our multi-asset investment views for June 2018

We have downgraded equities this month in Europe, Japan, Pacific ex-Japan and emerging markets. Here's why.

20/06/2018

Multi-Asset Investments

KEY

Asset classes

 
 
 

Equities

We have downgraded equities to neutral, reflecting our more cautious stance. Positive earnings revisions have become less widespread recently and a number of upcoming political events could lead to heightened risk aversion.

 

Government bonds

We remain negative on duration overall. Valuations have improved, but are not yet attractive enough. Cyclical and technical factors are still negative.

 

Commodities

The cyclical environment remains supportive, leading to strong fundamentals for most commodities. Momentum and carry continue to add support.

 

Credit

The late phase of the cycle and monetary tightening continue to create meaningful headwinds.

 

Equities

 
 

US

The US continues to be the most resilient economy and the source of many upward earnings revisions.

 
 

Europe

We have downgraded Europe to neutral. Cyclical indicators reflect that Europe is in a slowdown and earnings momentum has weakened. Political risk is also in focus again.

 

UK

We remain neutral on UK equities due to the continued risk of sterling appreciation and uncertainties around on-going Brexit negotiations.

 
 

Japan

We have downgraded Japan to neutral. Recent weakness in macroeconomic data and cyclical indicators point to a slowdown. Further yen strengthening would be a risk.

 
 

Pacific ex-Japan

Downgraded to neutral. Within the region, we favour Singapore – where the outlook has steadily improved – over Australia – whose economy faces structural challenges.

 
 

Emerging markets

We have downgraded to single positive. Valuations are relatively attractive, but trade tensions, elections and a stronger dollar may be near-term headwinds.

 

Government bonds

 
 

US

Still expensive against a backdrop of a negative term premium, a large increase in supply and higher currency-hedged yields available in Europe.

 
 

UK

We have downgraded gilts to negative, leaving our score in line with other major markets and because of recent outperformance.

 

Germany

Weather and cautiousness may slow the ECB, but normalisation is underway. QE is due to taper in Q4, ending by year end, removing support from Bunds.

 

Japan

No change. The Bank of Japan’s firm stance in April suggests that it is still too early to downgrade this market.

 

US inflation linked

We remain positive on breakevens but are becoming more cautious as initial targets have been hit and seasonality is expected to turn negative.

 

Emerging markets local

We remain neutral after last month’s downgrade. Carry is still positive, but downside risks have grown.

 

Investment grade (IG) corporate bonds

 
 

US IG corporate bonds

The increase in funding costs is likely to put forward pressure on coverage ratios.

 

European IG corporate bonds

Despite the year-to-date widening, spread valuations do not yet look completely attractive.

 
 

Emerging markets USD

After the recent selloff, we used the opportunity to upgrade to neutral. Valuations are still not compelling but carry is more attractive.

 

High yield bonds

 
 

US

This is the best performing market year-to-date, but the margin for error continues to be limited so we remain neutral.

 

Europe

Risk sentiment has weighed heavily on spreads, especially for those names with high exposure to Italy.

 

Commodities

 
 

Energy

Global oil demand for remains stable, particularly from China and India, while falling Venezuelan output and upcoming sanctions against Iran remain supportive.

 

Gold

We remain negative on gold, which we expect to struggle in an environment of rising real yields and the stronger US dollar.

 

Industrial metals

Continue to look attractive against a backdrop of globally synchronised growth and a strong and stable Chinese economy. Momentum has also recently strengthened.

 

Agriculture

Favourable supply/demand dynamics lead us to retain a positive view.

 

Currencies

 
 

US dollar

We believe that temporary factors such as trade protectionism and political risk will keep the USD stronger than its fundamentals imply.

 

UK sterling

GBP is still driven by Brexit newsflow. Our negative view is unchanged as we still see GBP as being vulnerable to further growth and inflation downgrades.

 

Euro €

We believe that European economic activity will recover from recent weakness, with the European Central Bank announcing the end of quantitative easing this year.

 

Japanese yen ¥

We think any strengthening of JPY would stem from its hedging properties rather than its fundamentals, particularly as the JPY continues to be cheap within the G10 space.

 

Swiss franc ₣

We continue to hold a neutral view on CHF and we don’t expect the Swiss National Bank to change its current policy.