Lucas Financial Consulting Ltd

US Treasuries

LIGHT

QE tapering going into Janet Yellen’s term as chair of the Federal Reserve (Fed) will put pressure on bond yields, although the Fed will act to prevent a rapid escalation. The fiscal debate adds to market uncertainty.

European Bonds

HEAVY

A moderate economic recovery with very low inflation provides support for bond yields, while peripheral spreads tighten as investors look for yield opportunities.

UK Gilts

LIGHT

UK gilts are increasingly vulnerable to the pick-up in economic growth and valuations are expensive. Manageable inflation pressures and central bank actions can anchor rising bond yields.

Japanese Bonds

LIGHT

The inflation outlook is deteriorating as the government aims for reflation, although the Bank of Japan bond-buying programme should prevent yields rising too significantly.

Global Inflation-Linked Debt

NEUTRAL

Valuations in individual countries warrant careful examination; the asset class is underpinned by investor worries about future inflation triggered by easy monetary policies.

Global Emerging Market Debt

HEAVY/NEUTRAL

Dollar-denominated bonds are Heavy as spreads show better value, while local currency bonds are Neutral as careful examination is required of individual currency and spread factors.

Investment Grade Debt

NEUTRAL

Attractions such as positive corporate cashflows are increasingly priced in, while upward pressures from government bond markets will periodically affect total returns.

High Yield Debt

NEUTRAL

Although spreads have come in moderately, the outlook for bond defaults remains supportive. Yields are still relatively attractive as long as the outlook for corporate earnings remains positive.

US Equities

HEAVY

Underlying fundamentals in terms of consumer spending, housing and business confidence are improving, offset by such headwinds as fiscal tightening and higher borrowing costs.

European Equities

NEUTRAL

Valuations are supportive and corporate competitiveness improving, but fiscal programmes and structural reforms remain constraints while the ECB has not managed to improve credit availability in many sectors.

Japanese Equities

HEAVY

The government is pushing ahead with major monetary and fiscal policy changes, as well as structural reforms; corporate earnings should particularly benefit from a more competitive currency.

UK Equities

HEAVY

The improvement in both the domestic economy and overseas order books is feeding through into stronger earnings growth for a wider range of companies.

Developed Asian Equities

LIGHT

Slower commodity demand from key economies such as China still affects the wider region; currency strength has hampered economic rebalancing in some countries.

Emerging Market Equities

NEUTRAL

Performance is increasingly divergent; while some countries benefit from strong domestic fundamentals, others are under pressure from current account deficits and tighter monetary policy required to stabilise depreciating exchange rates.

UK

HEAVY

The weak growth environment is expected to impact prices in the near-term but yields remain attractive compared to other assets, suggesting returns above cash over a three-year holding period.

European

NEUTRAL

The market remains polarised with Northern European centres and good quality assets expected to be relatively robust, offsetting weakness in much of Southern Europe.

North American

HEAVY

We see the best prospects in under-developed industrial locations in Canada and the cyclical US office markets where future supply is at 30-year lows.

Asia Pacific

NEUTRAL

Excess supply in several key markets, e.g. China, will hold back growth, but offices in some of the Australian markets, for example, remain supported by a good demand/supply balance.

Foreign Exchange

Very Heavy US Dollar, Neutral Sterling, Light Euro and Light Yen

The US dollar will benefit from the slow tightening of monetary policy, while a weaker euro and yen will eventually support their economies.

Global Commodities

NEUTRAL

Different drivers, such as a rise in the US dollar, Chinese demand, Middle East tensions, and climatic conditions influence the outlook for different commodities.

NEUTRAL

While some central banks have pledged to keep interest rates lower for longer, others are beginning to tighten monetary policy, especially in emerging markets.