Our multi-asset investment views - September 2024
We maintain a positive view on equities due to strong underlying fundamentals.
Authors
🟢 Long / positive
🟡 Neutral
🔴 Short / negative
🔼 Up from last month
🔽 Down from last month
Main Asset Classes
🟢Equities
We continue to hold a positive view on equities due to strong underlying fundamentals. Although the rate of upgrades for US companies’ earnings has slowed down, the upward trend in revisions continues.
🔴 Government bonds
Low layoffs, strong consumer consumption and healthy household balance sheets support our base case of a soft landing. Hence, we remain negative as we believe market expectations for rate cuts are too optimistic.
🟡Commodities
A modest growth outlook, weak sentiment in China and disappointing manufacturing data keep us neutral on most sectors. However, we remain positive on gold, anticipating further upside.
🟡Credit
Implied volatility in credit markets has remained elevated, likely reflecting lingering uncertainty on the economy. However, attractive yields have remained a strong tailwind for the market, leaving us neutral overall.
Equities
🟢US
We expect US equity prices to rise in Q4 as the Federal Reserve is set to continue to cut interest rates whilst US political uncertainties should subside.
🟢UK
The election outcome has stabilised the market and improved sentiment, which should allow prices to return to historical levels.
🟡🔼Europe
We have upgraded to neutral as the recent drop in inflation towards the European Central Bank’s 2% target increases the probability of a rate cut. However, manufacturing purchasing manager indices remain weak.
🟡Japan
Despite the recent market turbulence, corporate earnings and macro data have improved. We maintain a neutral stance due to the less attractive risk/return profile.
🟡🔽Global Emerging Markets1
Our conviction in the region has weakened with the slowdown of the global manufacturing cycle. Without stronger performance from China, the likelihood of emerging markets outperforming developed markets is low.
🟡 Asia ex-Japan: China
We retain our neutral score - the domestic economy continues to be sluggish, hampered by the property sector, while the export sector has performed better.
🟡🔽EM Asia ex China
We have downgraded our view as we expect the recent slowdown in the global manufacturing cycle to impact key export markets such as Taiwan and South Korea.
1Global Emerging Markets includes Central and Eastern Europe, Latin America, and Asia.
Government bonds
🔴 US
We maintain a negative score as valuations look extremely expensive, particularly at the front end of the yield curve. A yield curve is a line that plots the yields of bonds that have equal credit quality but differing maturity dates.
🟡 UK
Despite the fall in inflation and the Monetary Policy Committee's decision to lower interest rates in August, we prefer to stay neutral for now.
🟡 Germany
We have retained our neutral stance as persistently weak manufacturing data supports the case for more interest rate cuts by the European Central Bank but note that service inflation remains sticky.
🟡 Japan
Whilst yields look attractive on a risk adjusted basis, the market is expecting two rate hikes by the end of 2024 as headline inflation is increasing. We therefore remain neutral.
🟡 US inflation linked bonds
We expect inflationary pressures to continue to abate whilst the growth outlook appears reasonable, and consumption remains healthy.
🟡 Emerging markets local currency bonds
While the carry and valuation levels of EM local bonds are appealing, we remain neutral as wider spreads are primarily concentrated among a few distressed issuers. Carry refers to the potential to borrow in a territory where interest rates are relatively low and invest the borrowed money into an asset that provides a higher rate of return in a different territory, otherwise known as a carry trade.
Investment grade credit
🟡 US
We maintain a neutral score. Whilst valuations have improved and the liquidity environment remains stable, the uncertain macro outlook poses a risk.
🟡 Europe
European credit has experienced a slightly slower recovery and remains attractive relative to the US. However, we remain neutral as the backdrop in Europe is not as positive.
🟡Emerging markets USD
We have maintained our neutral stance. Even though EM corporate bonds are expected to benefit from strong fundamentals and technical tailwinds, valuations remain expensive.
High yield bonds (non-investment grade)
🟡US
We remain neutral as valuations have improved but are not yet attractive enough. The maturity wall remains under control, however, fundamentals have weakened slightly.
🟡Europe
Attractive valuations and easing financial conditions in Europe are supportive. However, the macroeconomic backdrop remains relatively weak, leaving us neutral overall.
Commodities
🟡 Energy
Chinese demand growth is falling short of expectations, while the supply side is maintaining market stability. OPEC+ have confirmed the decision to postpone the re-deployment of production in Q4.
🟢 Gold
We maintain a positive view. Real yields should fall as growth and inflation slow, while technical factors remain supportive for limiting downside.
🟡Industrial metals
Weak Chinese data remains the main factor capping any upside for metal prices. While there have been some small indications of reduced inventory, overall, economic conditions are not strong enough to support a positive outlook.
🟡Agriculture
An abundance of supply continues to dominate the backdrop and expectations of La Niña conditions have faded further, which has improved the supply outlook.
Currencies
🟡🔽US $
We have switched our view on the US dollar to neutral. The risks of a more pronounced slowdown have reduced following the large cut in US rates.
🟡UK £
While the pound should benefit from political stability and improved sentiment, we remain neutral overall given the recent volatility.
🟡🔼 EU €
Although the macroeconomic outlook remains weak, we have upgraded our score to neutral as interest rate differentials relative the US dollar have narrowed.
🟡 CNH ¥
Growth remains weak and the recent appreciation can be explained by the interest rate differential versus the US, leaving us neutral.
🟢🔼JPY ¥
Whilst other major central banks are implementing easing policies, we have revised our outlook to positive given the contrasting tightening stance of the Bank of Japan.
🔴Swiss franc ₣
We remain negative as the persistent deflationary pressures in Switzerland should lead the Swiss National Bank to ease more or to weaken the domestic currency.
Source: Schroders, September 2024. 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.
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