Our multi-asset views for December 2018
In our latest monthly update we discuss rising market volatility, our upgrade to gold and bonds as a diversifier.
Our models suggest valuations for equities are turning more reasonable after recent corrections. However, some caution is warranted. Improving (lower) valuations often come with worsening momentum and increasing volatility.
The economic picture has deteriorated amid disappointing data, but we think that government bonds have rallied too far, leaving valuations expensive.
Expected return from commodity futures has fallen back to its historic average. We like gold as a hedge against further economic weakness.
November saw spreads – the amount of yield above government bonds - widening across sectors in all regions, continuing a pattern of weakness in credit for the year to date.
Although earnings revisions have deteriorated, our expectations for earnings and revenue growth for next year are still supportive of the region.
With the US dollar downgrade, a resulting stronger euro may become a headwind for European equities. The region’s political and economic climate remains fragile.
Momentum and economic indicators are both close to neutral levels, so we remain slightly cautious on the UK equities.
Productivity is improving, deflation may be over and private company investment (capex) is rising, so we believe Japanese equities offer an attractive proposition for equity risk.
Ongoing trade war developments, together with local country-specific risk factors, pose a threat to profits, but as valuations become more attractive, we keep a neutral stance.
Valuations are, in our view, attractive especially following the significant sell-off so far this year. A more stable dollar could be a catalyst for a stronger EM earnings story in coming months.
Data has disappointed, but we think the market has overshot to become too dovish. Treasuries can still be a useful diversifier against an economic slowdown.
Brexit uncertainty means the range of possible outcomes is still very wide – the Bank of England could be hiking or cutting next year.
Whilst valuations look high, the steep yield curve and disappointing data mean that investors will likely continue to own Bunds, thus tempering any negative view.
Mixed growth data amid the absence of significant inflation pressures will likely leave the Bank of Japan on hold for some time. Japanese government bonds are in the middle of the Bank of Japan’s range.
US inflation linked
We are now neutral on US inflation, as a lower oil price weighs against the late cycle effects of tightening capacity.
Emerging markets local
Cyclical headwinds continue to prevent us from taking advantage of the improvement in local market valuations.
Investment grade (IG) corporate bonds
US IG corporate bonds
Fundamentals are continuing to weaken and the relatively low quality composition of the market makes it vulnerable to further spread widening.
European IG corporate bonds
Fundamentals have been relatively strong but the region remains buffeted by political and trade headwinds, weighing on projected earnings at a time when supply exceeds demand.
Emerging markets USD
We believe that the regional mix and underlying path of earnings marginally favours investment grade emerging market corporate bonds over their high yield counterparts.
High yield bonds
We expect the supply/demand situation in US high yield to deteriorate and maintain our view that it is overpriced and vulnerable.
The European market is due a period of readjustment from what remain extraordinarily low levels of yield as conditions start to normalise.
Without oil production cuts or unpredictable supply shocks (e.g. Iran, Libya and Venezuela), supply and demand looks well balanced.
Gold continues to show safe-haven characteristics as equity volatility rises and bond yields fall, but any further strength in the US dollar remains a headwind.
Investor sentiment remains cautious awaiting concrete evidence for trade details, and of Chinese infrastructure stimulus and growth stabilization.
We remain positive given attractive fundamentals and scope for further recovery should trade war resolutions materialise.
We expect softer US activity to translate into lower rates, providing an important liquidity boost for the rest of the world and a flatter dollar.
The Prime Minister winning her no-confidence vote is a sign the chance of a no-deal Brexit has fallen, but would need parliament approval / Second referendum to add to sterling.
Upgraded on the basis of expecting a flattish USD, as well as some tentative signs of recovery.
Japanese yen ¥
We were too optimistic on JPY, given that valuation is not extreme. Continue to expect monetary policy convergence to drive JPY next year.
Swiss franc ₣
We expect the Swiss National Bank Governing Board to leave monetary policy unchanged, only raising interest rates when euro-area policy makers begin to hike.
The views and opinions contained herein are those of Schroders’ investment teams and/or Economics Group, and do not necessarily represent Schroder Investment Management North America Inc.’s house views. These views are subject to change. This information is intended to be for information purposes only and it is not intended as promotional material in any respect.