Economics

Our multi-asset views for September 2018

Here's what's changed in our views on a wide range of investment types this month, with a number of changes in the currencies space.

30 September 2018

Multi-Asset Investments

KEY

Asset classes

 
 

Equities

Despite the expected market impact of the current US trade dispute, we think that markets will in the future become less focused on politics, which could create positive opportunities in equity markets for those focused on fundamentals.

 

Government bonds

We think bond yields will still rise further. Bond prices fall when yields rise so we remain negative.

 

Commodities

The economic environment is positive for commodities while most sectors are supported by tight supply and demand characteristics.

 

Credit

August saw investment grade yields little-changed with a broad decline in government bond yields providing a supportive backdrop.

 

Equities

 
 

US

We continue to have regional preference for the US given the resilience of corporate profits.

 

Europe

Our view on eurozone equities remains unchanged, as we take into account global trade tensions and the central bank bringing and end to extraordinary policy measures such as bond buying and very low interest rates.

 

UK

We are neutral as we believe the market is still dominated by political noise, with little sign that this can be resolved soon.

 

Japan

While weakness in macroeconomic data and indicators suggest a slowdown, attractive valuations keep us neutral.

 

Pacific ex-Japan

Indicators suggest momentum has declined in the past couple of months but we see areas of opportunity at the regional level.

 

Emerging markets

Despite signs of waning economic momentum in emerging markets, especially China, we remain positive as valuations are starting to look attractive.

 

Government bonds

 
 

US

US government bonds (Treasuries) continue to look expensive. Given the Federal Reserve’s tendency to telegraph interest rate decisions we do not see the pace of rate increases becoming an issue

 

UK

Valuations remain expensive. Uncertainties around Brexit continue and further rate hikes may not materialise until a credible Brexit plan comes together.

 

Germany

German government bonds (Bunds) remain expensive. As the European Central Bank steps away from market-friendly policies such as buying bonds, the market will have to assess whether low yields are sustainable.

 

Japan

We believe that inflation is the critical factor in whether the Bank of Japan might consider reining in some of the policies introduced to support markets. We expect the current monetary policy stance to stay in place until inflation is close to target.

 

US inflation linked

We remain positive on US inflation. While the historic tendency for inflation to be weaker in the second half of the year, will weigh on expectations, we see fears of stagflation, (stagnant growth combined with rising inflation) coming to the fore.

 

Emerging markets local

We remain neutral as economic headwinds prevent us from taking advantage of the improvement in local market valuations.

 

Investment grade (IG) corporate bonds

 
 

US IG corporate bonds

Fundamentals may be starting to weaken as shareholder-friendly behaviour, such as share repurchases by companies, becomes more prevalent, to the detriment of bond holders.

 

European IG corporate bonds

European corporates are in a stronger position, though the recent pickup in merger and acquisitions and shareholder activism are potentially reasons to be more cautious as they tend to be negative for corporate bond holders.

 

Emerging markets USD

We believe that the regional mix and positive earnings growth marginally favours EM corporates and sovereigns over high yields bonds in developed markets.

 

High yield bonds

 
 

US

High yield (non investment grade) bonds are expensive and vulnerable to outflows, with conditions (low supply in particular) unlikely to be as favourable as they were in the first half of the year.

 

Europe

Continuing political instability in the region is likely to weigh against the asset class, hence we retain our negative view.

 

Commodities

 
 

Energy

Global oil inventories are low; over the next six months there are risks to supplies from a number of OPEC countries that could lead to a spike in oil prices.

 
 

Gold

Downgraded to single negative, partly due to our view on its momentum. Despite normally being regarded as a safe-haven at times of uncertainty, gold has not significantly reacted to trade tensions.

 

Industrial metals

Industrial metals look oversold on risks to global trade, fundamentals are supportive and China looks set to boost demand with increased infrastructure spending.

 

Agriculture

The recent sell-off has been based on concerns over trade war escalation as opposed to fundamentals; in addition, weather-related risks don’t seem reflected in prices.

 

Currencies

 
 
 

US dollar

Despite its expensive valuation, we see room for further deterioration in growth and political sentiment against a continued backdrop of gradual monetary policy tightening.

 
 

UK sterling

We no longer see a strong case for excessive depreciation given that hard Brexit, having emerged as a serious possibility, now appears mostly priced in.

 
 

Euro €

EUR is downgraded on further economic slowdown and increased political tension, particularly between Italy and other members of the EU.

 
 

Japanese yen ¥

The Bank of Japan is now increasingly seen as likely to be forced to begin withdrawing extremely easy policy (extremely low interest rates and asset purchases); weaker growth should support the yen given its reputation as a perceived safe haven currency.

 

Swiss franc ₣

Remains neutral - with its status as a perceived safe haven currency, CHF should see relative outperformance vs. EUR.

 

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