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The Multi-Asset Indicator

  • Market review

    Market review

    Download PDF Indicator

    In this quarter's edition:
    • Value is dead. Long live Value!
      - A letter from Philip Saunders, co-head of Multi-Asset Growth
    • Detailed insight on each asset class

    A sharp fall in Growth markets in May was bookended by much stronger returns in April and June, leading to an ultimately fruitful, albeit volatile, second quarter of 2019 for most assets.

    Within Growth assets, US equities were the strongest performing equity market reaching a new record high over the period. UK and European equities were close behind. Japanese and Asian equities, however, bucked the trend with modest negative returns as trade discussion uncertainties impacted sentiment. Emerging markets underperformed developed markets, and Chinese equities suffered from trade uncertainty, lagging all other main markets.

    Elsewhere, emerging market local debt had a strong quarter thanks to a supportive monetary policy backdrop and a weakening US dollar, with hard currency debt slightly behind. It was another positive quarter for credit, while listed property had a relatively subdued quarter. Finally, the commodities complex experienced a negative quarter, with oil prices slightly lower after a volatile period.

    Among Defensive assets, government bonds had a strong quarter with yields falling across most developed markets and at most maturities. As noted above, the US dollar weakened against most G10 and emerging market currencies. Sterling, however, was the worst performing currency as further Brexit uncertainty and increased prospects of a ‘no deal’ weighed on returns. The Japanese yen, by contrast, was the best performing G10 currency.

    Within Uncorrelated assets, gold prices rallied by almost 10% over the quarter given fears around slowing global growth and the prospect of peak US interest rates being reached.

    At a glance - our asset class views

    ---o+++
    Equities
    North America  
    Europe ex UK  
    UK  
    Japan  
    Asia ex Japan  
    Emerging markets  
    ---o+++
    Government Bonds
    North America  
    Europe ex UK  
    UK  
    Japan  
    EM Hard Currency  
    EM Local Currency  
    IG Corporate Bonds  
    HY Corporate Bonds  
    ---o+++
    Currencies
    US dollar  
    Euro  
    Sterling  
    Japanese Yen  
    Asia ex Japan  
    Emerging Markets  

      View for the coming 6 to 12 months* Previous quarter's view

    *Views of Investec Asset Management’s Multi-Asset team and reflect preferences within respective asset class. As at 30.06.19.

    Key themes for the coming 6-12 months

    • Will the US and China reach a trade compromise or will the uncertainty continue?
    • Slowing global growth – will Chinese stimulus off set deceleration of the US?
    • How will central banks’ dovish rhetoric be reflected in policy rate changes?

    For professional investors and financial advisors only. Not for distribution to the public or within a country where distribution would be contrary to applicable law or regulations.

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    This document is not for general public distribution. If you are a retail investor and receive it as part of a general circulation, please contact us at +44 (0)20 7597 1900.
    The information discusses general market activity or industry trends and is not intended to be relied upon as a forecast, research or investment advice. The economic and market forecasts presented herein reflect our judgment as at the date shown and are subject to change without notice. These forecasts will be affected by changes in interest rates, general market conditions and other political, social and economic developments. There can be no assurance that these forecasts will be achieved. Past performance should not be taken as a guide to the future, losses may be made. Data is not audited. Investment involves risks: Investors are not certain to make profits. Where index performance is shown, this is for illustrative purposes only. You cannot invest directly in an index. Investec Asset Management does not provide legal and tax advice. The information contained in this document is believed to be reliable but may be inaccurate or incomplete. Any opinions stated are honestly held but are not guaranteed and should not be relied upon.
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    Except as otherwise authorised, this information may not be shown, copied, transmitted, or otherwise given to any third party without Investec’s prior written consent. © 2019 Investec Asset Management. All rights reserved. Issued by Investec Asset Management. Issued by Investec Asset Management, issued July 2019.

    Investment Team
    There is no assurance that the persons referenced herein will continue to be involved with investing for this Fund, or that other persons not identified herein will become involved with investing assets for the Manager or assets of the Fund at any time without notice. References to specific and periodic team meetings are not guaranteed to be held or fully attended due to reasonable priority driven circumstances and holidays.

  • A letter from your PM



    Value is dead. Long live Value!

    - A letter from Philip Saunders,
    co-head of Multi-Asset Growth

    Philip Saunders

    The first half of 2019 saw another abortive attempt of the ‘value’ equity approach to rally. After a particularly rough ride in 2018, something of a squeeze was arguably extremely likely. But this faded rapidly, leaving quality growth in the ascendant as has been the case for most of the current cycle. So why has value investing been so disappointing since the global financial crisis, and is this set to change?

    This has clearly been an unusual cycle. Although global growth has been sustained in positive territory it has proved to be relatively anaemic. What’s more, central banks have persisted with zero or close to zero interest rate policies, coupled with bouts of quantitative easing. The correlation between value underperformance with the slope of the US yield curve has been very pronounced. Classical valuation factors such as price to book have worked particularly poorly, presumably because of the growth of the service sector and the growing importance of intangible assets as well as the fact that ‘everyone has got the model.’ Indeed, something which is often overlooked is the fact that part of the underperformance of value during this cycle can be attributed to its (paradoxically) relatively expensive valuation at the starting point. At that time large cap growth stocks traded at a discount on a trailing P/E basis to their large cap value counterparts (Russell 1000 Value Index). Investors could effectively access higher growth, and often higher quality, without having to pay up for it. This relative valuation opportunity has now largely unwound. But even now valuation differentials at the aggregate level are still not excessive.

    At a fundamental level the return of invested capital (ROIC) spread for cheap vs expensive stocks, on an earnings yield basis, has deteriorated meaningfully over the last 10 years.

    In part this could be ascribed to disruption which has been particularly prevalent in the current cycle, undermining many established business models and leading to de-ratings as a consequence. Deteriorating relative ROIC performance negates the primary basis of mean reversion in terms of valuation multiples that has underpinned value underperformance in the past. A more slowly growing ‘cake’ appears to have been increasingly divided in favour of the disrupters – such as Amazon – and companies with capital light models and earnings persistence.

    However, merely looking at the conventional value indices obscures the fact that some value investing methodologies have proved a lot more efficacious than others. Whereas conventional price to book approaches have suffered their worst 10 year periods of under-performance, the lowest P/E stocks have generally held up much better, even in the US market where quality growth stocks are relatively abundant. However, such stocks were not immune posting a poor 2015 and a particularly poor 2018.

    Over the longer-term value still comes out on top, so it shouldn’t simply be dismissed on the basis of misfiring over a single cycle and the structural arguments for believing that ‘value is dead’ are overplayed in our view. We retain our faith in ‘return recovery’ as a source of attractive, asymmetric return opportunities. Having said that we believe that cyclical conditions are going to remain challenging for the style, particularly given the fact that the value in value is overwhelmingly in cyclical stocks. Being highly selective and focusing on the sustainability of the underlying asset are set to remain absolutely critical.

    Philip Saunders
    Co-head of Multi Asset Growth

  • Equities

    Equities

    ---o+++
    Equities
    North America  
    Europe ex UK  
    UK  
    Japan  
    Asia ex Japan  
    Emerging markets  
    The US economy is weakening, consumer and business sentiment have deteriorated and earnings momentum has moderated.

    North America

    -- - o + ++
    North America  

    While the US Federal Reserves’ decision to pause interest rate hikes removes a key headwind for now, the US economy is seeing weakening economic growth. Consumer and business sentiment have also deteriorated from elevated levels in 2018 and earnings momentum has moderated. Further, robust levels of sales growth are not translating to equivalent earnings growth due to margin pressures. This less positive backdrop has resulted in a moderation of our score. We retain our preference for high-returning companies with earnings visibility that appear cheap given their cash-generating abilities.

    Europe ex UK

    -- - o + ++
    Europe ex UK  

    Fundamentals continue to remain weak with both domestic and export orientated companies seeing pressure. There are however tentative signs that domestic growth may be bottoming within Europe. This coupled with depressed valuations and negative sentiment offer the potential for a shorter-term rebound.

    UK

    -- - o + ++
    UK  

    We retain our neutral stance towards UK equities. Fundamentals and valuations alike are mixed, with Brexit related uncertainty exacerbating cyclical and structural issues seen in a number of industries such as retail and media. There are several UK domestic stocks, particularly financials, with capital return drivers that have become overly discounted though.

    Japan

    -- - o + ++
    Japan  

    Valuations continue to appear attractive but operating momentum is lacking for Japanese companies. While Japan has a disproportionate amount of ‘self-help’ stories, we believe that cyclical considerations will likely dominate over the near-term.

    Asia ex Japan

    -- - o + ++
    Asia ex Japan  

    For Asian equities broadly, fundamentals are still weak relative to other emerging markets but there are signs of stabilisation at the corporate level in terms of profitability and balance sheet strength. Valuation remains compelling but lingering tensions over trade continue to weigh on sentiment.

    In China, policy planning has been consolidated and centralised to focus explicitly on supply-side reform. China appears to be serious about the current reform programme, which should support the structural prospects for the Chinese economy and its equity market.

    Emerging markets

    -- - o + ++
    Emerging markets  

    Emerging market equities depend on a backdrop of supportive global growth and we believe emerging markets are further along through the growth deceleration than the US. Valuations remain cheap versus history and attractive relative to developed markets.

      View for the coming 6 to 12 months* Previous quarter's view

    *Views of Investec Asset Management’s Multi-Asset team and reflect preferences within respective asset class. As at 30.06.19.

  • Bonds

    Bonds

    ---o+++
    Government Bonds
    North America  
    Europe ex UK  
    UK  
    Japan  
    EM Hard Currency  
    EM Local Currency  
    IG Corporate Bonds  
    HY Corporate Bonds  
    Bonds, we’ve been expecting you... to rally strongly given the easing monetary policy of central banks. But will this shift prolong the current economic cycle?

    North America

    -- - o + ++
    North America  

    US Treasuries continued to rally strongly in the second quarter of 2019 amid an ongoing shift in rhetoric from policy makers that opened the door to reductions in official rates. Looking forward, it appears likely that the Federal Reserve will deliver on looser policy. On this basis, valuations now look quite expensive but less so when compared to other, far more expensive markets. If the shift to lower rates prolongs the economic recovery, longer maturities will underperform and the yield curve should steepen.

    Europe ex UK

    -- - o + ++
    Europe ex UK  

    The Eurozone economy remains lacklustre and there is a danger of inflation expectations becoming unanchored amid extremely low underlying consumer prices. The European Central Bank understand the danger of this, and despite only ending their quantitative easing programme at the end of December 2018, are preparing to loosen monetary policy further. This supported bonds over the second quarter of 2019, pushing yields further into negative territory and pushing valuations to very tight levels. Given this strong steer from valuations, we are more negative on eurozone bonds and see better opportunities in other markets.

    UK

    -- - o + ++
    UK  

    UK gilts underperformed most other markets during the quarter as the Bank of England, in contrast to the other main central banks, continue to see the need for tighter monetary policy. The economy has also been very difficult to read, with large shifts in in inventories distorting data. The market is now discounting reductions in Bank Rate, perhaps as expectations of a messy ‘hard’ Brexit increase. This makes gilts even more expensive and we see little reason to invest in them over the immediate future.

    Japan

    -- - o + ++
    Japan  

    Despite often trading to its own beat and being dominated by the continued large scale buying by the Bank of Japan, yields still rallied over the quarter. With such large scale repression being implemented by the authorities, there is no doubt that there is little relationship between fundamentals and valuation. However, the market swaps well into non- Japanese yen currencies, which increases our score slightly.

    Emerging Markets Hard Currency

    -- - o + ++
    Emerging Markets Hard Currency  

    The fundamental outlook for emerging markets is mixed, as on the one hand, the outlook for global growth is deteriorating, but on the other hand, financial conditions have eased and are likely to easy further. Valuations are still modestly cheap despite the recent rally, and we believe are more supportive than local bonds at the margin. Flows into the asset class have stabilised and positioning is more neutral.

    Emerging Markets Local Currency

    -- - o + ++
    Emerging Markets Local Currency  

    The fundamental outlook for emerging markets is mixed, as on the one hand, the outlook for global growth is deteriorating, but on the other hand, financial conditions have eased and are likely to ease further. Valuations are still modestly cheap despite the recent rally. Flows into the asset class have seen some support. A highly selective approach remains appropriate.

    Investment Grade

    -- - o + ++
    IG Corporate Bonds  

    Earnings have been solid and generally in-line with estimates, with the US doing better than Europe.

    However, deteriorating macro data leads us to be more wary about the market backdrop. Investor flows remain positive, while dovish commentary from the US Federal Reserve and European Central Bank is also supportive. Valuations continue to look expensive though, despite the pullback in May, weighing on the prospects for the asset class.

    High Yield

    -- - o + ++
    HY Corporate Bonds  

    As with investment grade markets, the fundamentals are solid, with earnings meeting expectations and dovish central bank rhetoric helping. Investor flows have recently been poor. Valuations are again the main constraint though with spreads against government bonds still tight. The asset class remains a beneficiary of the late cycle environment but as history has proven, high yield corporate credit is often one of the first casualties of any recession.

      View for the coming 6 to 12 months* Previous quarter's view

    *Views of Investec Asset Management’s Multi-Asset team and reflect preferences within respective asset class. As at 30.06.19.

  • Currencies

    Currencies

    -- - o + ++
    Currencies
    US dollar  
    Euro  
    Sterling  
    Japanese Yen  
    Asia ex Japan  
    Emerging Markets  
    Prospects on a Brexit ‘no-deal’ weighed on sterling, the Japanese yen did well in May’s market drop and the US dollar weakened amid expectations of rate cuts and slowing growth.

    US Dollar

    -- - o + ++
    US dollar  

    The US dollar declined over the last quarter given expectations of interest rate cuts over the short-term. From here, the greenback’s fortunes will be determined by the relative performance of the US economy to other major economic blocs. If the US slows markedly, perhaps as the impulse from fiscal policy fades whilst the eurozone, China and Japan see a positive benefit from a cease fire in trade wars, then the dollar is likely to fall. However, if this relative performance does not manifest itself, dollar will remain supported by relatively attractive interest rates. For choice, we favour the former. Its valuation remains expensive, as it has for several months now.

    Euro

    -- - o + ++
    Euro  

    Despite a more dovish message from the European Central Bank and a further shift into negative territory for eurozone government bonds, the euro performed reasonably well over the quarter. From here, however, its fortunes are likely to be determined by the US dollar, and if relative growth differentials between the two economies begin to close, it should break out from its tight trading range and rally. It remains cheap and we believe investors are underweight. However, until we see solid evidence of shifting GDP differentials, we remain neutral.

    Japanese Yen

    -- - o + ++
    Japanese Yen  

    The yen was, and continues to be, one of the best scoring currencies in our FX universe. Despite the rally over the past quarter, it remains cheap. We suspect, however, that it is now widely held by investors and this will temper gains from here – our score has been reduced accordingly. Crucially, however, the defensive qualities of the yen remains and we have seen nothing in recent market price behaviour to test our belief that it can act as an excellent hedge for Growth assets in our portfolios.

    Sterling

    -- - o + ++
    Sterling  

    Sterling was one of the worst performing currencies over the quarter as fears of a ‘hard’ Brexit haunted markets again. Our reduced confidence in divining a reasonable range of probable outcomes from here leads us to reduce our score to neutral from positive. Beyond Brexit, we believe the UK is suffering a supply side shock; productivity is low and the labour market tight, leading to relatively high domestic inflation. We believe this will eventually lead the Bank of England to increase interest rates more than market’s discount, and ultimately this will support sterling.

    Asia ex Japan

    -- - o + ++
    Asia ex Japan  

    We have not changed our longstanding view that Asian currencies are vulnerable to further downside as slow-moving factors, such as stretched financial cycles and the threat from Chinese competition will undermine performance.

    Over the quarter, the escalation in trade wars depressed them further but unless there is a full scale pull back of tariffs, it is hard to see performance changing much from here.

    Emerging Markets

    -- - o + ++
    Emerging Markets  

    The Federal Reserve’s pivot to a neutral monetary policy setting along with an end to their balance sheet reduction programme should support emerging market foreign exchange as investors seek out relatively high real returns. Our score has therefore increased modestly. As ever, it remains important to be selective in the space.

      View for the coming 6 to 12 months* Previous quarter's view

    *Views of Investec Asset Management’s Multi-Asset team and reflect preferences within respective asset class. As at 30.06.19.