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| Government bonds | ||
|---|---|---|
| US Treasuries | While market stress and safe-haven flows support Treasuries, tighter labour markets and the upward trend in wages give the Federal Reserve the rationale to raise interest rates steadily into 2017. | LIGHT |
| European Bonds | An environment of low inflation, modest economic growth, further QE and negative rates supports European bonds. Political pressures could periodically affect peripheral bond markets, requiring a quick ECB response. | NEUTRAL |
| UK Gilts | The Bank of England delivered significant easing measures as uncertainty related to the EU referendum outcome will cause the economy to slow. However, valuations are expensive. | NEUTRAL |
| Japanese Bonds | The introduction of yield curve control alongside negative interest rates and QE is the central bank’s latest attempt to reflate the economy. An absence of yield makes this asset class relatively unattractive. | Moved to LIGHT |
| Global Inflation-Linked Debt | Inflationary conditions are globally subdued but markets may react to a rise in headline inflation because of expansionary US fiscal policy. Meanwhile, commodity prices are starting to move higher once again. | NEUTRAL |
| Global Emerging Market Debt | We prefer dollar-denominated to local currency debt, both on valuation grounds and on expected dollar movement. On a selective basis, higher yields are attractive in an environment of easier monetary policy. | HEAVY |
| Corporate bonds | ||
|---|---|---|
| Investment Grade Debt | QE supports UK bonds, but has driven European yields to unattractive levels. US credit spreads are less attractive as Treasury yields increase and we prefer riskier assets. | Moved to NEUTRAL |
| High Yield Debt | The hunt for yield is driving more investors to this asset class, although overcrowding remains a risk in some sectors, especially in the US when monetary policy is being tightened. | HEAVY |
| Equities | ||
|---|---|---|
| US Equities | Equities are buoyant on the back of promised fiscal easing from President Elect Trump; while valuations are not historically attractive, dividends and share buybacks plus tax cuts are still supportive. | Moved to VERY HEAVY |
| European Equities | Corporate earnings may be adversely affected by the uncertainty shock resulting from the Brexit process and other political events. Concerns remain over some banking systems and a lack of strong credit growth. | NEUTRAL |
| Japanese Equities | Markets have priced in high expectations for monetary loosening and fiscal stimulus, so yen moves remain a primary driver of corporate earnings and business investment. | NEUTRAL |
| UK Equities | The UK economy has remained resilient post-EU referendum but uncertainty remains surrounding its future relationship with the EU. Sterling remains the primary driver of the relative attractiveness of UK companies with overseas exposure. | NEUTRAL |
| Developed Asian Equities | The macroeconomic improvement in emerging markets will have a positive feed through due to trade linkages, but expected US interest rate rises may offset this effect. | NEUTRAL |
| Emerging Market Equities | The outlook for Asia is dependent on US trade policy and the degree of monetary tightening. Those emerging markets that can benefit from higher oil prices are attractive after the change of policy by OPEC. | Moved to NEUTRAL |
| Real estate | ||
|---|---|---|
| UK | The referendum fallout continues to affect liquidity and cause capital depreciation. Income remains attractive versus other asset classes although risks are elevated should conditions turn recessionary or political uncertainty persists. | LIGHT |
| European | Core markets continue to offer attractive relative value in light of the low interest rate environment supported by QE, while recovery plays are showing consistent capital value growth. | VERY HEAVY |
| North American | The US market should benefit from an improvement in economic growth, although some Canadian property faces headwinds from an interest-rate sensitive consumer and significant office construction. | Moved to HEAVY |
| Asia Pacific | An attractive yield margin remains, but markets are divergent. Returns are driven by rental and capital value growth in Japan and Australia, but weakening elsewhere. Emerging Asia markets are risky. | NEUTRAL |
| Other assets | ||
|---|---|---|
| Foreign Exchange | The US dollar has rallied following the US election but will benefit from a steady tightening of monetary policy; Europe looks less well placed than Japan to cope with the next phase of currency pressures; sterling acts as a shock absorber after the EU referendum. | HEAVY $, NEUTRAL ¥, £. LIGHT € |
| Global Commodities | Different drivers, such as US dollar appreciation, Chinese demand, Middle East tensions and climatic conditions, influence the outlook for different commodities. | NEUTRAL |
| Cash | ||
|---|---|---|
| The US election result may mean a faster pace of interest rate rises is necessary should fiscal policy expansion lead to inflationary pressures. Easier policy is expected in Europe, Japan and the UK to revive economic activity. | Moved to LIGHT | |
Key Issues
Looking into 2017, global economic and profits cycles are turning up, helped by a more supportive monetary and fiscal landscape. Authorities finally appear to understand that continued, sustained expansion is required to get the world out of the stop-and-go cycle it has been in since the Great Recession.
Sustainable yield remains a key investment theme, with an emphasis on sustainability in those markets, credit or equity, where payout ratios are stretched. The House View remains underweight cash and overweight income-producing assets such as high yield bonds and emerging market debt. We expect only modest returns from government bonds in 2017, but they are no longer as overvalued as they were immediately following the UK’s EU referendum.
At the same time, we are looking for selected growth opportunities, as the profits outlook appears better in 2017. Within equity markets, the US looks the most dependable but also commands the highest valuation. Europe and Japan have suffered disappointments in 2016, due to weak domestic profits, European banking issues, and currency swings. Here we expect support from stable-to-slightly weaker exchange rates, plus the higher operating leverage of these markets to global growth. In foreign exchange, we remain positive on the US dollar given the underpinnings of relative growth and therefore tighter monetary policy versus the rest of the world.
In real estate, we find more attractive opportunities outside the UK. In the US and Europe, yields are attractive, rental growth is positive, and commercial development remains constrained, while there are some decent prospects in Asia. Property combines yield with some growth, a ‘sweet spot’ in terms of investment preferences.
| Warning: These funds may be affected by changes in currency exchange rates. |
| Warning: Past performance is not a reliable guide to future performance. |
| Warning: The value of your investment may go down as well as up. |
| Warning: If you invest in these funds you may lose some or all the money you invest. |
| Warning: A deferral period may apply to withdrawals and/or switches from certain funds. Please refer to your product documentation for further details. |