Our multi-asset investment views - May 2022
Our multi-asset investment views - May 2022
MAIN ASSET CLASSES
We remain negative on equities as markets are caught in the cross currents of concerns about rate increases and recessionary risks.
We remain neutral on bonds as recent moves have priced in a significant amount of monetary tightening for the year. Monetary tightening describes a situation where the availability of funds becomes less ample, which is presently occurring as many central banks around the world are tightening liquidity conditions.
We remain positive as heightened geopolitical risks stemming from Russia’s invasion of Ukraine, combined with the imbalance between supply and demand, remain tailwinds.
Given “stagflationary” concerns, our outlook remains cautious, with a preference for quality in developed markets. Stagflation describes a combination of slowing growth and accelerating inflation.
We remain negative; valuations in the US suggest that this is a market that is particularly vulnerable to the withdrawal of liquidity (tighter liquidity conditions) and the widening of the “equity risk premium”. The equity risk premium is the return from equities in excess of that from “riskless” asset such as cash.
The defensive and commodity biases in the FTSE index mean that the UK market should better withstand the geopolitical headwinds compared to other markets.
We remain negative, although acknowledge that negative earnings momentum may have reached a low point, as much of the bad news appears to be priced in from Russia’s invasion of Ukraine.
The Bank of Japan (BoJ) is pledging to keep bond yields down and is welcoming “imported inflation”. We remain neutral as we wait to see if Japan can lift itself out of deflation. Deflation describes a situation where consumer prices are falling which has been the case in Japan for the majority of time over the past two decades. Consumer inflation (rising prices) has recently returned, however, partly as a result of weakness in the yen, itself a consequence of the BoJ’s “yield curve control” policies. Yen weakness has increased the cost of imported goods and services giving rise to imported inflation.
Global Emerging Markets1
Although the region is not immune to the tightening of global financial conditions, we remain neutral due to attractive valuations and supportive policy.
Lockdowns and supply bottlenecks remain a headwind, however Chinese policymakers have pledged to support growth via monetary easing (where the availability of funds becomes more ample).
EM Asia ex China
We believe that other regions in the emerging market (EM) universe appear more attractive.
We upgrade to neutral to reflect the rapid repricing of rate rises by the market. As controlling high inflation remains the primary concern of the Federal Reserve (Fed) we expect them to continue their policy of aggressive monetary tightening.
We remain neutral as we believe too many rate hikes are currently priced in and recession risk is not imminent.
The European Central Bank (ECB) has performed a U-turn on a number of statements this year, and we now expect a rate rise as early as July.
The market continues to offer negative yields, which provide poor value in a portfolio context.
US inflation linked bonds
We remain negative as uncertainty from the Russia/Ukraine crisis appears to have peaked and now the Fed’s top priority is to contain inflation.
Emerging markets local currency bonds
Our view is unchanged as the economic environment remains challenging with stagflationary as well as recessionary risks mounting.
Investment grade credit
We upgrade US investment grade (IG), with robust fundamentals and widening credit spreads making valuations attractive. 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.
We retain our positive score in European IG due to attractive valuations combined with easing rates volatility and the continued risk of volatile equity prices.
Emerging markets USD
We have a preference for developed market IG as recent strength in EM has left credit spreads unattractive in comparison.
High yield bonds (non-investment grade)
We have downgraded as credit spreads have not materially widened and offer poor value given the equity and market backdrop.
We downgrade EU high yield to neutral as there has been no explicit support from the ECB, which is prioritising raising rates and ending asset purchases. The major central banks have accumulated large quantities of assets (mainly government bonds) under quantitative easing programmes – the purchase of such bonds was used to inject money directly into the financial system. Many have ended these schemes and the ECB is following suit.
We remain neutral, because although the supply and demand deficit remains, the continuing lockdowns in China are likely to dampen demand.
We remain positive on gold as it tends to be resilient in an environment of rising rates and geopolitical tension.
Although lockdown in China is a headwind to demand, policy stance remains supportive and geopolitical risk brings upside surprise to metals, of which Russia is a large producer.
India is considering restricting wheat exports after severe heat waves damaged crops, exacerbating stretched global supplies and price rises following the war in Ukraine.
We have retained our positive score due to the US dollar’s safe haven status and the increasing divergence in monetary policy between the Fed and the ECB.
The Bank of England’s Monetary Policy Committee delivered a rate hike with surprisingly “hawkish” comments but the hiking cycle may be curtailed if downside risks to growth materialise. Monetary policymakers are often described as hawkish when expressing concerns about limiting inflation.
Inflation risks in the eurozone have increased due to the rise in energy prices and slowing growth momentum. We have therefore kept our negative score.
We remain negative, as we expect a slowdown in exports, renewed Covid-19 related lockdowns and interest rate cuts to lead to a depreciation in the renminbi (offshore).
We have retained our neutral score based on the safe haven status of the currency and its attractive valuation, however we have a preference for the US dollar.
Swiss franc ₣
In terms of safe haven currencies, we prefer the US dollar over the Swiss franc as we have more conviction in the Fed’s path to normalisation.
1 Global Emerging Markets includes Central and Eastern Europe, Latin America and Asia.
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