Economics

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

Multi-Asset Investments

KEY

Asset classes

 
 
 

Equities

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.

 

Government bonds

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.

 

Commodities

The macroeconomic environment remains positive for commodities, while most underlying sectors are supported by favourable supply and demand characteristics.

 

Credit

Corporate bond yields have become less attractive following recent positive performance relative to government bonds.

 

Equities

 
 

US

We keep a moderately positive view on US equities as they continue to demonstrate the strongest momentum in both price and earnings revisions.

 

Europe

While we expect European equities to grind out a small positive return into year-end, the market will struggle to outperform the global index.

 

UK

If Brexit uncertainty abates, sterling could recover but this is unlikely to be supportive for UK large cap stocks given their global revenue exposure.

 
 

Japan

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.

 

Pacific ex-Japan

Trade war escalation could potentially impact growth, together with a strengthening dollar, which could also prove a headwind for profits.

 

Emerging markets

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.

 

Government bonds

 
 

US

The recent rise in yields has taken valuation closer to fair levels, but trade war-related risks and supply/demand dynamics keep us negative.

 

UK

Uncertainties around Brexit continue, and further rate hikes may not materialise until a credible Brexit plan comes to light.

 

Germany

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.

 

Japan

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

 
 

US

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.

 

Europe

As monetary conditions start to normalise, we think the European market will see a rise in yields from what are currently extraordinarily low levels.

 

Commodities

 
 

Energy

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.

 

Gold

We expect the US dollar to strengthen, which will weigh on gold prices.

 

Industrial metals

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

Agriculture prices appear low given possible weather-related risks and supply and demand dynamics.

 

Currencies

 
 

US dollar

Despite its expensive valuation, factors such as a deterioration in growth and political sentiment should continue to support dollar strength.

 

UK sterling

A “hard” Brexit seems mostly priced in, so we do not see a strong case for excessive depreciation.

 

Euro €

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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