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Our multi-asset investment views for May 2018

This month our infographic reveals we have downgraded a number of asset classes, but upgraded our view on the US dollar.

16/05/2018

Multi-Asset Investments

KEY

Asset classes

 
 

Equities

Outlook positive as earnings remain supportive, although we note the recent weakness in macroeconomic data and USD strength which could become near-term headwinds.

 

Government bonds

The sell-off leaves yields looking attractive relative to recent history, but we think they have further to rise to catch-up with the improvement in fundamentals.

 

Commodities

The cyclical environment remains positive, lending itself to strong fundamentals for most commodities. Momentum is strong while carry continues to improve.

 
 

Credit

Late phase of the cycle coupled with high leverage means investors should demand higher risk premia moving forward.

 

Equities

 
 

US

Valuations continue to remain elevated, but we expect earnings growth will continue to be strong in 2018, driven in part by the US tax cuts and rising share buybacks.

 

Europe

We expect European growth to remain strong, although we are monitoring the impact of a stronger euro.

 

UK

We remain neutral on UK equities due to the uncertainties around Brexit implications and better opportunities elsewhere.

 
 

Japan

Downgraded Japan to single positive as we do not see an immediate catalyst to allow Japan to outperform other major regions.

 

Pacific ex-Japan

Singapore continues to rank as our best country model, as earnings revisions momentum remains as strong as in the US, in addition to reasonable valuation levels.

 

Emerging markets

Our positive views on emerging markets remain unchanged, with stronger growth and relatively cheaper valuations.

 

Government bonds

 
 

US

Treasuries continue to look rich against a backdrop of negative term premium, a large increase in supply and higher currency-hedged yields available in Europe.

 

UK

We remain neutral. Data has deteriorated, but with no hikes priced for the Monetary Policy Committee until November there isn’t a buying opportunity today.

 

Germany

The European Central Bank should end quantitative easing this year, leaving Bunds as one of our main underweights alongside US Treasuries.

 

Japan

No change. We considered downgrading to negative this month, but the Bank of Japan’s firm stance in April suggests that it is still too early.

 

US inflation linked

We remain positive on inflation despite the recent strong performance of breakevens. Upward wage inflation and oil price pressures should be supportive.

 
 

Emerging markets local

Downgrade to neutral. Carry is positive, but downside risks have grown: higher DM yields leaves EM rates less attractive and several countries have elections this year.

 

Investment grade credit

 
 

US

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

 

Europe

Despite the year-to-date widening, valuations remain expensive.

 
 

Emerging markets USD

We have downgraded EM USD, as dollar strength aside, we find it hard to argue for EM spreads in a difficult mix of tight spreads and late cycle dynamics.

 

High yield credit

 
 
 

US

After a resilient performance YTD, we have downgraded to neutral: valuations don’t look attractive; some recent fiscal changes cause headwind over a medium-term horizon.

 

Europe

Fundamental picture for Europe remains generally stable and spreads have recently widened; however, valuations do not yet look very compelling, hence we stay neutral.

 

Commodities

 
 

Energy

We maintain our positive view given the attractive carry and supply dynamics on the back of renewed tensions in the Middle East and a collapse in Venezuelan oil production.

 

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

We are positive on agriculture, expecting it to perform well on the back of favourable supply/demand dynamics.

 

Currencies

 
 
 

US dollar

There are signs of dollar appreciation but we are concerned about the effect of higher US rates on carry.

 
 

UK sterling

We have downgraded to negative, as we anticipate sterling continuing to fall on slowing activity and reduced capital flows.

 

Euro €

We expect the pace of euro strength to moderate in the coming months.

 

Japanese yen ¥

As long as US-China trade tensions remain contained, economic impact is limited, but a surge in the yen as a safe haven asset would be a headwind to Japanese exports.

 

Swiss franc ₣

We remain neutral as we continue to expect minimal intervention by the Swiss National Bank.