Navigation Search
Close

Select your location and role to view strategy and fund content

Select country
  • Global homepage
  • Australia
  • Botswana
  • Denmark
  • Deutschland
  • España
  • Finland (Suomi)
  • France
  • Hong Kong (香港)
  • Ireland
  • Italia
  • Luxembourg
  • Namibia
  • Nederland
  • Norway
  • Österreich
  • Singapore
  • South Africa
  • Sweden (Sverige)
  • Switzerland
  • Taiwan (台灣)
  • United Kingdom
  • United States
  • International
Select role

Login to My Investec

  • Market review

     

    Download PDF Indicator

    Market review

     

    The majority of Growth markets achieved solid returns and volatility remained relatively benign

    Financial markets overcame several key concerns over the second quarter. These included the delay in tax and regulatory reforms in the US, elections in the UK and France, and further monetary tightening in China and the US. The majority of Growth markets achieved solid returns and volatility remained relatively benign.

    All the major equity markets generated positive returns, with emerging markets and Asia Pacific ex Japan equities leading the way for a second quarter running. Japanese equities, supported by strong economic data, were close behind, while US equities continued to scale new heights. European equities (including the UK) were positive but more subdued, tailing off in the second half of the quarter. High yield bonds also experienced another reasonable quarter despite the energy sector continuing to suffer from a falling and volatile oil market. Local and hard currency emerging market debt continued its strong run this year, while property securities globally also generated decent returns.

    Within Defensive assets, global government bond yields generally traded within a range for most of the quarter, before rising sharply towards the end of the period following a seemingly concerted effort by the main central banks suggesting a move away from ultra-loose monetary policy. The exception was the US, which saw falling yields at the belly and long end of the curve, resulting in yield curve flattening. The US dollar again underperformed a broad basket of currencies, including the majority of G10 currencies, with the Japanese yen also depreciating against most currencies over the period. Within Uncorrelated assets, gold traded within a range and ended the quarter slightly down, while infrastructure had another solid quarter.

    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 30.06.17.

    Key themes for coming 6-12 months

    • Modest Growth bias – the acceleration phase in activity appears to be ending, although bottom-up indicators are still generally favourable.
    • More ‘normal’ monetary policy – monetary policy will be less supportive with further normalisation, not just from the US.
    • Government bond yields capped – slow growth, structurally low inflation and high levels of debt make it hard for yields to sell off meaningfully.

     

     


    Multi-asset portfolios are subject to possible financial losses in multiple markets and may underperform more focused portfolios.

    Important Information

    The information may discuss 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 views presented herein reflect Investec Asset Management’s (‘Investec’) judgment as at the date shown and are subject to change without notice.There is no guarantee that views and opinions expressed will be correct, and Investec’s intentions to buy or sell particular securities in the future may change. The investment views, analysis and market opinions expressed may not reflect those of Investec as a whole, and different views may be expressed based on different investment objectives. Investec has prepared this communication based on internally developed data, public and third party sources. Although we believe the information obtained from public and third party sources to be reliable, we have not independently verified it, and we cannot guarantee its accuracy or completeness. Investec’s internal data may not be audited.

    Indices are shown for illustrative purposes only, are unmanaged and do not take into account market conditions or the costs associated with investing. Further, the manager’s strategy may deploy investment techniques and instruments not used to generate Index performance. For this reason, the performance of the manager and the Indices are not directly comparable.

    MSCI data is sourced from MSCI Inc. MSCI makes no express or implied warranties or representations and shall have no liability whatsoever with respect to any MSCI data contained herein. The MSCI data may not be further redistributed or used as a basis for other indices or any securities or financial products. This report is not approved, endorsed, reviewed or produced by MSCI. None of the MSCI data is intended to constitute investment advice or a recommendation to make (or refrain from making) any kind of investment decision and may not be relied on as such.

    If applicable, FTSE data is sourced from FTSE International Limited (‘FTSE’) © FTSE 2017. Please note a disclaimer applies to FTSE data and can be found at www.ftse.com/products/downloads/FTSE_Wholly_Owned_Non-Partner.pdf

  • A letter from your PM



    Benchmarks Schmenchmarks?

    - A letter from Philip Saunders

    Philip Saunders

    Conventional multi-asset benchmarks have generally had a bad press. They tend to be relatively simple combinations of largely developed market equities and bonds, often with heavy biases towards directional equity risk. The two big equity bear markets of 2000 and 2007 exposed benchmark investors to uncomfortable drawdowns, with bond exposure often failing to compensate for pronounced equity weakness. In terms of equity exposure mega and large-cap stocks are disproportionately favoured by benchmarks and in a global bond context the preference for the use of market capitalisation-based indices leads to a bias towards more extravagant sovereign borrowers.

    This experience, and a perception that in practice managers were not prepared to move positions materially away from the benchmark weights, has driven a broad shift towards outcome-oriented strategies, where risk in an absolute sense is a key focal point and the return objective is often measured as a margin in excess of cash or inflation. There are, however, two broad outcome-based approaches: ‘total return’ and ‘absolute return’. In the case of absolute return outcomes, the reliance on the directional performance of asset classes is generally reduced. Total return approaches, on the other hand, still tend to exploit market risk premia, although this exposure can be highly variable over time. Both seek to satisfy investor demands for a smoother return path.

    Since the dissatisfaction with benchmark-relative portfolios followed an extended period of underperformance resulting from a bear market in developed equity markets, it is perhaps not surprising that portfolios based on a conventional 60% equity/40% bonds benchmark structure have subsequently delivered attractive absolute returns at reasonable levels of volatility. However, 60/40, benchmark-relative managers have generally struggled to generate alpha (return in excess of the benchmark) in the current bull market, as attempts to de-risk have not paid off and the notoriously challenging US markets have persistently outperformed.

    The mantra of a low-return world has not, so far, come to pass. In effect, the growth of popularity in absolute return strategies shows that investors have been too preoccupied with avoiding market downside and have perhaps not focused sufficiently on capturing the available upside. The importance of this is starkly illustrated by the disappointing returns generated by the great majority of absolute return funds since the global financial crisis in 2008, during a period in which most asset classes have delivered strong returns. As Richard Bernstein puts it, “It is incredible that investors have basically been wallflowers during the second longest bull market of the post-war period. Investors’ fears about 2008’s bear market repeating has led them to avoid equities and take unrecognised risks in other asset classes”. This is not to say that absolute return funds cannot play a role in portfolios, but the challenges of relying exclusively on alpha and thus manager skill, needs to be understood.

    The attractive returns generated by 60/40 portfolios have substantially been the result of extended (and positively correlated) bull markets in both developed market bonds and equities, strongly supported by central bank policy. But bond yields are at or close to all-time lows and equity valuations are, on many metrics, at levels historically associated with much lower future returns.

    A benchmark’s true usefulness depends on how it is used. Arguably its most important function is to define a neutral risk budget, as opposed to a neutral capital allocation (as defined by the fund manager), ensuring that any default position in an investment strategy has sufficient market exposure over the longer term. The danger of any benchmark-based strategy, however, is that it leads to anchoring on a set mix of assets which reduces flexibility and can lead to a lack of resilience when market conditions change. In order to deliver a more stable outcome over time, any strategy requires flexible positioning relative to a neutral target with the ability to capture longer run risk premia, when available. This reduces the reliance on alpha which, as we all know, can be unpredictable.

    Despite their bad press, benchmarks can play an important role in ensuring acceptable outcomes for investors by setting a neutral risk budget that implies sufficient market exposure over time, provided that this is combined with sufficient flexibility.

    Philip Saunders
    Co-head of Multi Asset Growth

  • Equities

    Equities

    -- - o + ++
    Equities
    North America  
    Europe ex UK  
    UK  
    Japan  
    Asia ex Japan  
    Emerging markets  
    In Europe, fundamentals are continuing to improve with strong sales growth and a generally more supportive macroeconomic backdrop

    North America

    -- - o + ++
    North America  

    While US equity valuations are relatively stretched, the fundamental backdrop continues to improve meaningfully and help justify these levels. US equities continue to offer high quality more broadly. The US Federal Reserve’s (Fed) rate hiking path and forward guidance around balance sheet reduction have also been steady, without being too destabilising.

    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 are continuing to improve with strong sales growth and a generally more supportive macroeconomic backdrop. Valuations do not yet appear a constraint to further upside.

    Longer-term, any normalisation from the European Central Bank (ECB) through tapering is a potential headwind, while political risks do remain, albeit somewhat more contained.

    UK

    -- - o + ++
    UK  

    We remain more cautious on the prospects for UK equities where returns continue to be driven by conflicting factors. The market remains underpinned by easy monetary policy and sterling weakness, both of which are less supportive given a more hawkish central bank and a stronger pound.

    The uncertainty around Brexit negotiations under a newly formed hung parliament lingers, and evidence has emerged of more significant concerns for the real economy.

    Japan

    -- - o + ++
    Japan  

    Japanese equities remain one of our core themes. Valuations continue to appear attractive and fundamentally there are strong stock buyback trends providing attractive opportunities at the company level.

    Earnings expectations have turned sharply upward with the recent weakening of the yen and rise in bond yields. We are focused on companies with improving profitability driven by ‘self-help’ initiatives including capital efficiency.

    Asia ex Japan

    -- - o + ++
    Asia ex Japan  

    Like many other emerging markets, valuations still appear relatively attractive, albeit to a lesser extent than from last year. Despite having a strong first half of the year, the fundamentals in Asia ex Japan markets are still weak.

    In China, we have pared back our conviction somewhat although we continue to look for companies that stand to benefit from the country’s reforms, economic rebalancing and supportive valuation.

    Emerging markets

    -- - o + ++
    Emerging markets  

    Valuations have normalised somewhat across emerging market equities after a protracted period of looking relatively attractive. Fundamental momentum has also weakened, although there are no real signs of any significant strain.

    We note that price momentum is falling across regions, particularly areas like Latin America, emerging Europe, the Middle East and Africa.

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

  • Bonds

    Bonds

    -- - o + ++
    Government Bonds
    North America  
    Europe ex UK  
    UK    
    Japan  
    EM Hard Currency    
    EM Local Currency  
    IG Corporate Bonds    
    HY Corporate Bonds  
    Broadly speaking, we are constructive around the outlook for the emerging market local currency bonds, particularly in currency hedged terms

    North America

    -- - o + ++
    North America  

    While the US continues to recover steadily and the Fed is slowly normalising monetary policy, much of this is already priced into longer dated bond yields, and only large unfunded tax cuts, or an unexpected bout of second round inflationary pressure (prices and wages move higher together, accelerating inflation), is likely to see US Treasuries sell off aggressively. We view them as fairly valued.

    We believe Canadian bonds look expensive. As the output gap has closed at a faster rate, the Bank of Canada has signalled more hawkish intentions and we are therefore negative on the outlook for the bonds.

    Europe ex UK

    -- - o + ++
    Europe ex UK  

    Core euro-zone bonds are well supported by continued quantitative easing and potential risk events in 2017. However, German bunds are not particularly cheap and the euro-zone economy is performing well, despite subdued core inflation.

    For now, euro-zone bond yields remain range bound, but the ECB might be exiting super easy monetary policy later this year and looking forward, this will pressure yields higher.

    UK

    -- - o + ++
    UK    

    Gilts have now moved closer to fair value after looking very expensive. With signs that the economic resilience post-Brexit is beginning to fade, we believe they will likely remain supported.

    We prefer the shorter end of the Gilt yield curve where we believe it is pricing in too many increases in the bank rate.

    Japan

    -- - o + ++
    Japan  

    The Japanese government bond market remains largely dominated by the Bank of Japan (BoJ) with measures such as direct yield targeting limiting the scope for moves either way in the short term.

    We are neutral on Japanese government bonds. The market is slightly cheap but is dominated by the actions of the BoJ.

    Emerging Markets Hard Currency

    -- - o + ++
    Emerging Markets Hard Currency    

    Opportunities exist for more growth orientated, short duration names and demand from institutional investors remains high. However, valuations are somewhat stretched and are less attractive relative to both local currency bonds and their own history.

    The Fed’s rate hiking cycle presents some challenges for hard currency debt, particularly as inflationary pressures pick up and with greater protectionist policies from the Trump government.

    Emerging Markets Local Currency

    -- - o + ++
    Emerging Markets Local Currency  

    Broadly speaking, we are constructive around the outlook for the emerging market local currency bonds, particularly in currency hedged terms. In several key markets we see a positive cyclical and structural inflation story which should prove supportive.

    Flows have also been very strong of late, and the broader market does not appear too heavily owned opening the scope for this to continue further.

    Investment Grade

    -- - o + ++
    IG Corporate Bonds    

    The nearer-term fundamental outlook appears constructive with central bank support still helping to underpin the market. Valuations still appear reasonable, but they are starting to look increasingly expensive.

    Caution is warranted as upward yield pressure on government bonds could subsequently put pressure on the asset class, particularly as the Fed continues to hike interest rates, although this subsided somewhat over the quarter.

    High Yield

    -- - o + ++
    HY Corporate Bonds  

    The outlook for high yield credit remains constructive, on balance. Fundamentals are robust with strong first-quarter earnings while default rates in the US continue to fall to new lows. The ECB also remains a meaningful buyer in the market and the primary market is undersupplied.

    However, valuations are increasingly looking challenged with a further rally over the quarter.

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

  • Currencies

    Currencies

    -- - o + ++
    Currencies
    US dollar  
    Euro  
    Sterling  
    Japanese Yen  
    Asia ex Japan  
    Emerging Markets  
    We are neutral on the euro, with the positive and downside case firmly balanced

    US Dollar

    -- - o + ++
    US dollar  

    The US is enjoying a strong economic bounce in the aftermath of the US election. However, the momentum of positive economic surprises has been slowing of late which is calling into question the need for further interest rate normalisation.

    The US dollar does still appear expensive, which contributed to its poor start to the year. From here, it feels like further upside is contingent on more aggressive monetary policy from the Fed, and it’s hard to see it breaking through its range otherwise.

    Euro

    -- - o + ++
    Euro  

    We are neutral on the euro, with the positive and downside case firmly balanced. Faster economic growth and still-attractive valuations are offset by the negative political risks from countries such as Italy.

    More broadly, medium-term risks lie to the downside due to structural concerns about weak inflation and wages, where any upside pressure has typically been fairly limited and transitory.

    Japanese Yen

    -- - o + ++
    Japanese Yen  

    Japan’s economy is showing increasing signs of optimism, while the yen is very cheap, particularly against the US dollar. Typically, this would help form a positive picture for the currency but it is being undermined by lower interest rates domestically relative to the US.

    More specifically, as Japanese government bond yields remained static given BoJ intervention, and US Treasury yields rose, the yen has come under pressure. This trend has reversed somewhat, but remains a constraint to any sustained rally.

    Sterling

    -- - o + ++
    Sterling  

    Sterling remains very cheap and continues to be shunned by many investors. The economy is still holding up reasonably well (albeit with modest economic weakness more recently) and there are signs that the government is seeking a transitional arrangement as an exit from the European Union.

    A hung parliament might compromise this somewhat, but we still anticipate that an agreement will be reached which should soften the blow from Brexit and should see sterling begin to revert back to fair value although the currency remains challenged more structurally.

    Asia ex Japan

    -- - o + ++
    Asia ex Japan  

    Asian currencies still look particularly vulnerable to further downside. Many Asian economies are at the peak of their financial cycles, yet their financial conditions are tightening due to the rally in the US dollar.

    This dynamic will likely undermine their economies and we expect the currency markets to bear the brunt of any adjustment process that will be necessary.

    Emerging Markets

    -- - o + ++
    Emerging Markets  

    Like other emerging market assets, several currencies have enjoyed a strong run of late meaning valuation is not as attractive on a broad-based level.

    In a universe with significant regional variation we remain positive on select currencies which stand to benefit from domestic reforms and a stabilisation in commodity prices.

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