Our multi-asset investment views - April 2021
Our multi-asset investment views - April 2021
MAIN ASSET CLASSES
The recent stabilisation in bond yields gives equity markets room to breathe while the liquidity environment (i.e. the ready availability of funds) remains supportive. We continue to favour the value style (a style of investing which focuses on stocks that appear to trade at a lower price relative to their fundamentals, such as dividends or earnings).
Despite the steep rise in yields seen so far this year, there is still scope for yields to nudge higher as the vaccine roll-out broadens out and fiscal stimulus starts to bite. Fiscal stimulus is a tool used by policymakers in an attempt to manage economic fluctuations.
Vaccine distribution and fiscal stimulus are driving the recovery in demand while supply remains pressured by under-investment across many sectors.
The probability of a vaccine-led recovery in Q2 2021 has positive implications for credit; however, the recent tightening in credit spread levels has made valuations less 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.
The more stable rate environment helps the quality/growth style, while there is scope for positive surprises in the upcoming Q1 earnings announcements. A growth style of investing focuses on stocks whose revenues and earnings are expected to increase at a faster rate than the average company. Higher quality stocks refers to industry leading businesses with attributes such as strong cash flows.
The UK continues to offer attractive valuations and an exposure to the value sectors of the market, which should benefit from a post-pandemic reopening.
Under-owned Europe is well supported by the European Central Bank (ECB) and well-exposed to the global activity normalisation. The vaccine programme is also improving.
Export growth is accelerating, which we expect to continue as the economic recovery progresses.
We continue to favour Korea/Taiwan as their manufacturing outlook remains bright with low semiconductor inventory alongside high global demand.
We are neutral on emerging markets (EM) and although some markets remain attractive, this is offset by a stronger US dollar, a peak in earnings and recent China regulatory action.
We still expect yields to grind higher given the stimulus and growth story. However, higher yields, a growth disappointment and inflation could alter the outlook.
We remain negative towards the UK, given the re-opening plan remains on track as the vaccine rollout continues to progress.
Despite an improvement in valuations, yields remain very low and there has been little change from the ECB.
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 remain positive as we still see further upside, particularly within longer maturities. We are, however, cognisant that the market is increasingly pricing in our outlook.
Emerging markets local currency bonds
Despite some attractive markets in Asia, the broader EM local market appears vulnerable, particularly given the rise in idiosyncratic risk from Turkey and Russia.
Investment grade credit
The continued tightening in credit spread levels has made valuations even richer, meaning spreads have limited room to tighten further. Technically, negative price action tends to cause investment outflows in this market.
Technicals and fundamentals are more supportive compared to the US market. The ECB’s support programmes continue to aid European investment grade (IG) credit.
Emerging markets USD
We have taken the opportunity to reduce our exposure to EM corporate IG credit given recent spread tightening; however, we continue to favour higher quality credits.
High yield bonds (non-investment grade)
Corporate leverage has fallen but remains at near all-time highs. At the same time, interest coverage for high yield corporates remains at record low levels.
We remain concerned about the lack of a coordinated recovery programme and should banks continue to tighten lending criteria, there will be rising insolvency risk.
OPEC+ – an alliance between OPEC members (Organization of the Petroleum Exporting Countries) and other oil producing states – announced a gradual increase in production through Q2 although it is unlikely that this will be enough. Meanwhile, oil inventories continue to be drawn down as demand recovers.
Gold has recovered from oversold levels. However, ongoing central bank stimulus continues to underpin the low interest rate environment, which should support prices.
Despite weakening credit growth in China, demand in the rest of the world should recover strongly as economic activity normalises.
Demand for US soybeans continues to rise following the re-opening of the world economy, and with supplies low, this should support prices.
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.
The speedy rollout of vaccines coupled with the gradual removal of restrictions has been positive; however, the yield differential between US versus the British pound has narrowed.
We remain neutral for now due to the lack of growth catalysts, although we do expect a bounce back later in Q2 and beyond following the vaccination progress.
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 the Japanese yen.
Swiss franc ₣
Downgraded as the outlook for Europe has improved following the recent acceleration in the rollout of Covid-19 vaccines as well as the ongoing recovery in global growth.
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