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Our House View
The House View process provides a consistent macroeconomic framework to analysing global financial markets. It creates a clear forward-looking strategic direction for all of our investment decisions, particularly asset allocation within the traditional balanced funds but it also underpins our absolute return strategies. The House View is formed by the Global Investment Group (GIG) on the basis of internal research from the Global Strategy Team, covering a range of macro-economic, behavioural, liquidity and structural drivers in each of the major economies and markets.
May 2013
The following portfolio is based upon a global investor with access to all the major asset classes.
If you prefer, you can access a text-only version of our house view.
Government bonds
US Treasuries
NEUTRAL
QE, prolonged low policy rates, muted inflation pressures and safe haven purchases will prevent yields from rising too quickly. Fiscal concerns are a factor amid continuous political uncertainty.
European Bonds
NEUTRAL
Although ongoing fiscal and political problems overshadow the region, the ECB is still able to provide support for peripheral borrowers. Political pressures require careful monitoring.
UK Gilts
LIGHT
Although the weak economic recovery and continued fiscal tightening provide support for the gilt market, valuations are expensive and QE worries some investors about future inflation risks.
Japanese Bonds
NEUTRAL
Although the Bank of Japan is extending its bond-buying programme, yields are very low and the inflation outlook is deteriorating as the government aims for reflation.
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 can narrow, while local currency bonds are Neutral as careful examination is required of individual currency and spread factors.
Corporate bonds
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
HEAVY
Although spreads have come in moderately, the outlook for bond defaults remains supportive. Yields are still relatively attractive although the market is more vulnerable to any sizeable asset class rotation.
Equities
US Equities
HEAVY
The underlying fundamentals in terms of consumer spending, housing and business confidence are slowly improving, although there will be further headwind from continued fiscal tightening.
European Equities
LIGHT
Valuations and corporate competitiveness are better, but fiscal programmes remain a serious constraint 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; corporate earnings should particularly benefit from a more competitive currency.
UK Equities
NEUTRAL
Companies face tough export markets but cashflow is positive and being put to work. A measure of confidence is seen in rising private sector job creation.
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 divergent; while some markets benefit from upgrades to sovereign debt ratings, others face growing inflationary pressures, credit concerns and valuation issues.
Real estate
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 Australia, for example, remain supported by a good demand/supply balance.
Other assets
Foreign Exchange
Very Heavy US Dollar, Neutral Sterling, Light Euro and Light Yen
On valuation grounds, the US dollar is relatively cheap while the euro is relatively expensive. We await further policy decisions in Japan to reinforce the yen’s recent path.
Global Commodities
NEUTRAL
Different drivers, such as Chinese demand, Middle Eastern tensions, drought in the US and infrastructure initiatives, influence the outlook for different commodities.
Cash
NEUTRAL
Central banks have pledged to keep interest rates lower for longer.
Key issues
Within our funds, we are slowly adding to our equity positions, as we are more reassured about the ability of policymakers to create growth for the world economy. Most importantly, the Japanese authorities have begun a major QE programme aimed at halting the lengthy period of deflation. The situation in Europe appears more manageable after the recent elections, helped by support from the ECB, while tighter policy in the US and China has only had a moderate effect on growth. Many emerging economies have cut interest rates, helped by an absence of inflation pressures. However, financial markets will become increasingly vulnerable to any major changes in policy, for example if QE looked set to end in the US.
We remain positive on the ability of companies to generate profits, as the subdued economic backdrop in many developed nations is more than offset by continued expansion in many emerging economies. Stock selection is key as top-line sales growth, increases in wages and raw material costs, the impact of currency appreciation, and the ability to borrow vary considerably from company to company. Overall, a recovery towards positive earnings growth into 2013-14 would be very supportive.
Given the current environment, we continue to favour sustainable income yield from sources such as high-yielding corporate bonds, commercial real estate and equity income, although valuations are becoming less supportive for selective bonds and equities after their recent strong performance. We do not favour low-yielding assets, such as many government bonds and cash, especially in an environment where there are longer-term inflation risks.
Where foresight meets conviction
Whatever your involvement in the financial markets, you will understand that they present ongoing, never-ending challenges. That’s why we’re focused firmly on the future - anticipating and identifying the next compelling investment opportunities for our clients.
Our House View provides a clear, forward-looking strategic direction for our investment decisions. It’s the crux of all our investment insights, taking into account the many factors that shape the outlook for the major asset classes. It ensures we have a consistent approach to managing market risk across our product range, and acts as a bedrock for the decisions our investment teams take on a daily basis.
How the process works
The Global Investment Group is the team that collates our House View. After in-depth analysis, the GIG forms a broad view of asset allocation, based on current market drivers and economic forecasts. Across our portfolios, we describe our positions within markets, sectors and stocks as being Very Heavy, Heavy, Neutral, Light and Very Light, relative to the portfolio's benchmark.
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