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The Multi-Asset Indicator

  • Market review

    Market review

    Download PDF Indicator

    In this quarter's edition:
    • De-dollarisation: A letter from Philip Saunders, Co-Head of Multi-Asset Growth
    • Detailed insight on each asset class

    Markets rallied significantly over the first quarter of 2019, with a change in rhetoric from the US Federal Reserve and a potential US-China trade resolution buoying returns for most asset classes. Chinese equities led the way over the first quarter, from being the worst performing market in 2018, as newly announced local fiscal stimulus and the potential for trade resolution boosted returns. US, European and Asian stocks also saw double digit returns as, at the start of the quarter, a more dovish Fed encouraged risk appetite among investors. Emerging market equities marginally underperformed developed peers, while Japanese equities lagged.

    Oil prices recovered sharply from falls in the previous quarter contributing to a strong quarter for commodities. Listed property benefited meaningfully from the rally in both equities and government bonds. Given the ‘risk-on’ environment, we saw a narrowing of credit spreads, with high yield outperforming investment grade while the US outperformed Europe in both asset classes. Hard currency emerging market bonds enjoyed healthy single digit returns, outperforming local bonds, with some country-specific issues holding back returns in the latter towards the end of the quarter.

    Government bonds spent much of the quarter range-bound before rallying in late March following further dovish remarks from the Fed. As a result, yields for the major markets finished the quarter at levels last seen in 2017 or before. This meant some segments of the US curve remained inverted, once again raising the spectre of a possible recession. The US dollar had a mixed period relative to other currencies. The Japanese yen depreciated modestly given dovish rhetoric from the central bank and poor economic data, while sterling appreciated as Brexit outcomes continued to ebb and flow.

    Gold prices reached a peak in mid-February before falling back, leading to a slight positive return over the quarter, while returns in infrastructure were driven by company-specific factors.

    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 31.03.19.

    Key themes for the coming 6-12 months

    • Slowing global growth - will Chinese stimulus off-set deceleration of the US?
    • Is monetary policy normalisation done for this cycle or is there more to come?
    • Populist shifts in the political order, which have the potential to unsettle markets.

    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.

    Important Information

    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 April 2019.

  • A letter from your PM



    De-dollarisation

    - A letter from Philip Saunders,
    Co-Head of Multi-Asset Growth

    Philip Saunders

    The settled consensus among most market participants is that any shift in the monetary order away from the US dollar will happen gradually and take decades. After six of the last seven years in which the dollar has risen against other currencies, that may be understandable. Moreover, past currency transitions have taken decades, so this one should too.

    We are less convinced.

    Consider the following developments from 2018. Petroyuan futures, launched last year in Shanghai, have already overtaken benchmarks in Singapore and Dubai by volume. Meanwhile, a special purpose vehicle, Instex, was created earlier this year by the UK, France, and Germany to permit payments to Iran. Less surprisingly, Russia shifted $100bn of dollar-denominated reserves into renminbi, euros and yen last year.

    In general, the increasing weaponisation of economic sanctions since President Trump’s inauguration (but also before) is driving countries to seek refuge from the long arm of US financial authority. No country wants their main bank to be fined billions of dollars—as occurred to France’s BNP Paribas in 2015—for not adhering to another state’s foreign policy. As if to underline the growing doubt in the current monetary order, Commission President Juncker at the last European State of the Union address emphasised, “it is absurd that European companies buy European planes in dollars instead of euros.”

    All this is happening while the shale revolution continues unabated in the US. By 2025, it is set to overtake Saudi Arabia as the world’s biggest oil exporter. Effectively, the US is buying less international crude oil at precisely the same time the Chinese are ramping up purchases, increasing the opportunity for oil exporters to accept other currencies.

    Moreover, structural changes in Chinese demographics imply a need to internationalise the renminbi before too long. China’s working age population peaked in 2016 and will decline going forward. That matters because half the increase in Chinese household savings since the 1970s were driven by demographics. Going forward, higher household dissaving will put pressure on the current account. Of course, China would prefer to borrow in its own currency than incur foreign currency denominated debt in perpetuity—one reason why China continues to internationalise the renminbi.

    As if all this were not enough, concerns about US twin deficits are re-emerging. Renewed political polarisation in the US, on the right and now increasingly the left, imply budget deficits as far as the eye can see, driven by tax cuts and higher social spending. Congressional Budget Office forecasts show US debt hitting 152 per cent of output by 2048 from 78 per cent today.

    None of this is to imply that the US dollar will not remain a key international currency, if not the most important one, for some time to come. Nevertheless, the coming market cycle is likely to be different, for all the reasons discussed above. The rise of a challenger like China that is less willing to subscribe to a US-led order (as Japan and Germany did), is a fundamentally different development. The emergence of a genuine multipolar world will have a profound impact on markets and will affect nearly every asset class. After nearly seven years of a dollar bull market, investors should be aware that the nature of the change unfolding could be structural rather than purely cyclical.

    Read the full piece on the Investment Institute.

    Philip Saunders
    Co-head of Multi Asset Growth

  • Equities

    Equities

    ---o+++
    Equities
    North America  
    Europe ex UK  
    UK  
    Japan  
    Asia ex Japan  
    Emerging markets  
    Emerging market equities are supported by the relatively robust late cycle environment, against a backdrop of supportive global growth. Valuations are also cheap versus history and attractive relative to developed markets.

    North America

    -- - o + ++
    North America  

    The US economy remains the key driver of global economic growth, while the US Federal Reserve’s decision to pause interest rate hikes removes a key headwind for now. Consumer and business sentiment have deteriorated from elevated levels in 2018 however, and while strong earnings growth continues to underpin US equities, the degree of strength has moderated.

    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 moderate on a macroeconomic level, domestic and export-orientated companies are seeing pressure and tensions from escalating trade wars will also continue to weigh on sentiment in bouts.

    However, we believe the feed through of Chinese stimulus provides a back-stop to the market, which when combined with depressed valuations and negative sentiment, offers the potential for a 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, media and banking.

    Japan

    -- - o + ++
    Japan  

    Valuations continue to appear attractive and fundamentally the market offers up some companies with improving profitability driven by ‘self-help’ initiatives including capital efficiency. That said we believe that the momentum behind this trend has stalled at the aggregate level and cyclical considerations will likely dominate over the near term.

    Longer term, tightening from the Bank of Japan or any protracted period of yen strength are concerns, although it would take a meaningful move from current levels for either to become a significant hindrance.

    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 are supported by the relatively robust late cycle environment, against a backdrop of supportive global growth. Valuations also 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 31.03.19.

  • Bonds

    Bonds

    ---o+++
    Government Bonds
    North America  
    Europe ex UK  
    UK  
    Japan  
    EM Hard Currency  
    EM Local Currency  
    IG Corporate Bonds  
    HY Corporate Bonds  
    US treasuries have rallied strongly as the Federal Reserve shifted from a tightening bias to data dependency and neutrality.

    North America

    -- - o + ++
    North America  

    US treasuries have rallied strongly as the Federal Reserve shifted from a tightening bias to data dependency and neutrality. Interest rate expectations have subsequently shifted further and are now discounting cuts in official interest rates, leaving the market close to fair value. However, in a global context, they remain better value than most other markets and have a relatively high yield.

    We therefore believe there’s potential for them to outperform over the coming months. If the Federal Reserve is truly data dependent, any lasting economic weakness will be met with interest rate reductions, leading to the outperformance of shorter-dated bonds, relative to longer-dated, thereby steepening the yield curve.

    Europe ex UK

    -- - o + ++
    Europe ex UK  

    The Eurozone economy is lacklustre and inflation is persistently low. Despite successfully navigating the end of their quantitative easing programme, the European Central Bank has pushed out the eventual normalisation of monetary policy, resulting in yields falling and 10-year German bunds finishing the quarter in negative territory. We mark eurozone bonds as expensive, and believe it is unlikely they can deliver positive returns over a medium-term investment horizon.

    However, they swap well into non-euro currencies, giving them similar qualities to Japanese government bonds.

    UK

    -- - o + ++
    UK  

    UK gilts remain very expensive, and we believe they will underperform. We have previously discussed the UK’s supply side problem and remain concerned that domestic price pressures are rising. We continue to believe the UK will avoid a messy exit from the EU and that any resolution will see yields rise sharply and the economy reverse some of the clear Brexit related weakness it has experienced.

    This will then enable the Bank of England to start its tightening of monetary policy in earnest, undermining gilt prices further.

    Japan

    -- - o + ++
    Japan  

    For such a large market, turnover in Japanese government bonds remains low and completely governed by the ongoing Bank of Japan (BoJ) purchases. The previous debate concerning the cost versus benefit of these operations has faded as inflation slips back and the economic headwinds increase. However, in the medium term, the BoJ cannot buy their own government’s bonds indefinitely, and so we believe yields will have to eventually rise.

    They remain attractive on a currency swapped basis though, and this characteristic increases our score slightly.

    Emerging Markets Hard Currency

    -- - o + ++
    Emerging Markets Hard Currency  

    The fundamental outlook for emerging markets is mixed, data surprises are stable and financial conditions have eased. Valuations are still modestly cheap despite the recent rally, and we believe are more supportive than local bonds.

    Flows into the asset class are still positive with hard currency seemingly the preferred route of choice for investors expressing a positive EM view.

    Emerging Markets Local Currency

    -- - o + ++
    Emerging Markets Local Currency  

    The fundamental outlook for emerging markets is mixed, data surprises are stable and financial conditions have eased. Valuations are reasonable although some markets have rallied significantly meaning that overall valuations are less supportive than hard currency local bonds.

    Flows into the asset class have slowed down but are still positive. A highly selective approach remains appropriate.

    Investment Grade

    -- - o + ++
    IG Corporate Bonds  

    Fundamentals are still positive overall with earnings comfortably beating depressed earnings expectations over the last quarter. Investor flows have turned positive, while dovish commentary from the US Federal Reserve and European Central Bank is also supportive.

    Valuations continue to look expensive though, weighing on the prospects for the asset class.

    High Yield

    -- - o + ++
    HY Corporate Bonds  

    As with investment grade markets, the fundamentals are sound, with earnings comfortably beating depressed earnings expectations over the last quarter and dovish central bank rhetoric helping. The asset class has also seen a positive reversal from an investor flow point of view.

    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 31.03.19.

  • Currencies

    Currencies

    -- - o + ++
    Currencies
    US dollar  
    Euro  
    Sterling  
    Japanese Yen  
    Asia ex Japan  
    Emerging Markets  
    The yen is one of the best scoring currencies in our FX universe. It remains cheap and we believe investors are underweight.

    US Dollar

    -- - o + ++
    US dollar  

    The US dollar has remained resilient within a narrow range in recent months despite the Federal Reserve’s shift in their monetary policy stance. With US interest rates relatively high, the cost of selling the greenback is expensive, and so as long as the US economy remains reasonably firm relative to other major economies, the dollar will remain supported.

    The currency is expensive on our measures though leading to our neutral view. In the medium term we expect the dollar to fade as growth slows toward a lower trend rate and the valuation mismatch is unwound.

    Euro

    -- - o + ++
    Euro  

    We remain neutral on the euro despite a positive valuation and investor underweights. Whilst household demand has held up well in response to a solid labour market and rising wages, the external sector remains vulnerable to slowing Chinese demand and trade war headwinds. With inflation struggling to gain any real traction, the European Central Bank will likely keep monetary policy extremely loose, which will continue to undermine the single currency.

    Only when relative growth picks up, likely leading to a narrowing in interest rate differentials, would we expect the euro to rally significantly.

    Japanese Yen

    -- - o + ++
    Japanese Yen  

    The yen is one of the best scoring currencies in our FX universe. It remains cheap and we believe investors are underweight. Whilst slow global trade has undermined the Japanese economy, the defensive qualities of the yen remain undiminished and we continue to believe it can act as an excellent hedge for Growth assets in our portfolios.

    Our score is reduced modestly to reflect the rally seen from the weakest point in late 2018.

    Sterling

    -- - o + ++
    Sterling  

    Despite political turmoil in the UK, sterling has performed well so far this year, confirming our view that the tail risk possibility of a ‘hard’ Brexit was overstated by market participants.

    Once we finally receive some clarity over the UK’s withdrawal from the EU, we expect hedges to be lifted and pent up demand to buoy the economy, thereby supporting the currency further.

    Asia ex Japan

    -- - o + ++
    Asia ex Japan  

    We have not changed our 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.

    Whilst a resolution to trade wars might give a short-term fillip, signs of slower growth in the consumer technology sector will not help sentiment.

    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 31.03.19.

     

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