Our multi-asset investment views for October 2018
This month in our update of our investment views, we have upgraded equities overall, and also specifically Japanese stocks.
29 October 2018
We have become more positive on equities as valuations have improved and investor attention is moving away from trade wars and towards fundamentals. As a result, we expect the equity market to be influenced more by genuine drivers of return, rather than political noise on trade policy.
Given robust growth and rising inflationary pressures, we think interest rates are on their way up. If interest rates increase, bond prices will fall given their inverse relationship.
The macroeconomic environment remains positive for commodities, while most underlying sectors are supported by favourable supply and demand characteristics.
Corporate bond yields have become less attractive following recent positive performance relative to government bonds.
We keep a moderately positive view on US equities as they continue to demonstrate the strongest momentum in both price and earnings revisions.
While we expect European equities to grind out a small positive return into year-end, the market will struggle to outperform the global index.
If Brexit uncertainty abates, sterling could recover but this is unlikely to be supportive for UK large cap stocks given their global revenue exposure.
We have upgraded our view in recognition of the early signs of earnings recovery and relatively attractive valuations, and will look for opportunities to build up exposure.
Trade war escalation could potentially impact growth, together with a strengthening dollar, which could also prove a headwind for profits.
Valuations are attractive, especially following the significant sell-off so far this year. Investors may find the strong emerging markets earnings story attractive in coming months.
The recent rise in yields has taken valuation closer to fair levels, but trade war-related risks and supply/demand dynamics keep us negative.
Uncertainties around Brexit continue, and further rate hikes may not materialise until a credible Brexit plan comes to light.
German government bonds (Bunds) remain expensive, with no rate hikes priced until late 2019 / early 2020. Nonetheless, the recent sell-off has helped make their valuations less unattractive, so we may reduce our underweight soon.
We remain neutral. Inflation is still low so we expect monetary policy to stay loose (i.e. interest rates to stay relatively low).
US inflation linked
We continue to believe that US inflation will rise as the economy remains in good health with high levels of employment.
Emerging markets local
We maintain a neutral view. Despite the improvement in local market valuations economic headwinds are still present.
Investment grade (IG) corporate bonds
US IG corporate bonds
Corporate behaviour such as share buybacks (when a company buys back its own shares from investors) is seen as positive for shareholders but not as beneficial for the bond market. This is because such moves usually require a higher debt load, which could lead to lower bond prices. Given an increase in such shareholder-friendly behaviour in the US, the outlook for the bond market has become more negative.
European IG corporate bonds
We maintain the existing underweight position given regional political risk that is not being adequately compensated for with higher yields.
Emerging markets USD
The positive earnings growth we are seeing in emerging markets (EM) means we marginally favour high quality EM corporate and sovereign bonds over their high yield (i.e. non-investment grade) counterparts.
High yield bonds
We see the US high yield market as overpriced in view of outperformance over the past few months. This has partly been due to low levels of new bond issuance, which may not continue.
As monetary conditions start to normalise, we think the European market will see a rise in yields from what are currently extraordinarily low levels.
Given supply-side constraints (such as the potential for supply shocks and limited global capacity to increase supply), we remain positive on the oil price.
We expect the US dollar to strengthen, which will weigh on gold prices.
Fundamentals remain supportive given that we assume China will increase infrastructure spending and initiate policies to stabilise credit growth. China is the world’s biggest consumer of industrial metals, so events in the country tend to impact global prices.
Agriculture prices appear low given possible weather-related risks and supply and demand dynamics.
Despite its expensive valuation, factors such as a deterioration in growth and political sentiment should continue to support dollar strength.
A “hard” Brexit seems mostly priced in, so we do not see a strong case for excessive depreciation.
Our negative view is unchanged as risk of further economic slowdown persists and political tension between the core countries of the eurozone and periphery is ongoing.
Japanese yen ¥
Japanese growth remains robust and there are some signs of higher inflation, which will have an impact on Bank of Japan policy and therefore the currency. The yen is also perceived as a safe haven in times of global economic slowdown.
Swiss franc ₣
With its status as a perceived safe haven currency, the Swiss franc should see relative outperformance versus the euro.
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