Spring Investment Monitor: Asset classes

John Stopford, head of multi-asset income at Investec Asset Management

Equities

We determine any investment’s outlook according to a common framework, called compelling forces. This involves scoring an asset according to its fundamental, valuation and technical merits to develop a thorough understanding of its return potential. Equities look attractive on this basis and we continue to find the most bottom-up opportunities in this asset class. Strong earnings trends are supported by decent momentum and market breadth now spreading to more cyclical sectors. These positives are marginally offset by somewhat demanding valuations, but it is notable that valuations provide little guidance to asset returns over the next one to three years.  

Bond yields

Developed market sovereign bond yields are likely to experience some upward pressure – leading to limited potential for attractive total returns – as economic readings continue to display decent positive momentum. Survey data has posted material advances in the past quarter and inflation measures have firmed. Bond yields look expensive relative to history, though they reflect lower trend growth than that experienced before the financial crisis, meaning there is unlikely to be significant room for yield rises from here. 

Commodities

This is a disparate asset class ranging from energy through to agricultural products. As income-orientated investors, we tend to favour implementing opportunities identified in this area through other related yield-generating assets. We have noted some fundamental improvement in the energy complex with Opec’s application of production quotas and tightening of future supply, and this is supported by improving momentum and less extreme investor positioning. The valuation argument is less compelling at these levels, however, and therefore we think it is best to exploit the opportunity presented by commodities in other ways, such as through related equities.

Property

Rising yields have affected global real estate markets. This initial reaction is typical and requires some time for investors to adjust. The sector can perform well in a rising rate environment if combined with rental growth fuelled by improving economics. The sector offers decent value relative to other asset classes. We are generally positive on property as a yield asset class underpinned by tangible assets and embedded growth with stable cashflows in an inflationary environment.

Cash

While cash can provide stability in times of market distress, a significant allocation can be detrimental to returns when inflation appears to be rising. This is particularly the case when rates are low or indeed negative – as they are across many developed markets. We continue to find sufficient opportunities across and within asset classes, leading us to conclude that cash is not a particularly attractive investment at present.

Thushka Maharaj, global multi-asset strategist, JPMorgan Asset Management

Equities

With global equities at record levels, what many are calling the ‘Trump rally’ or the reflation trade actually began some months earlier, but the US election gave it a shape and a focus that was previously absent. Out went the monetary policy emphasis and ‘lower for longer’, and in came a more reflationary world view. We maintain a positive fundamental view on US stocks even as we see the improving global economic environment creating a favourable backdrop for other equity regions. We view our regional exposures not as rotating away from the US, but as diversifying a core holding. Early winners are likely to be Japanese stocks – where domestic data is adding to the positive cyclical picture – and to a lesser extent emerging markets.

Bond yields

Given the continued strength in the nominal growth outlook, we remain underweight duration. We have a modest overweight to Treasuries, but that is more than offset by the underweight positions in lower yielding bonds, for example [German] Bunds. We maintain our preference for carry through an overweight to US high-yield credit, taking comfort that recent positive economic momentum makes a US recession seem less likely in the near term. Credit is likely to outperform government bonds in a more reflationary environment, but is less likely to outperform equities.

Commodities

We maintain a broadly neutral view on commodities and expect that the wide trading range that has characterised the past two quarters of 2016 will narrow modestly. We see the oil price moving into the low-to-mid $50s per barrel as the market moves swiftly into balance following Opec’s production cuts. Strong Chinese economic data should support copper and iron ore in the near-to-medium term, but given our high conviction in a moderately stronger dollar, we do not expect significant moves to the upside.

Property

Markets are treating the emergence of a more reflationary environment positively, and prevailing economic data suggests the economy is in reasonable shape. With attractive operating income and undemanding valuations, this environment is supportive for real estate. Assets that price off long-term cashflows, and thus have a quasi-duration element, rarely respond well to sharply rising discount rates. Nevertheless, in our central case the ferocity of the rise in yields following the US election is unlikely to persist. We expect US rates to settle into a higher range of 2-2.75 per cent at the extremes, but note that aggregate global demand for safe assets remains high and that Fed members are still doves at heart. 

Cash

We remain underweight cash as negative policy rates in Europe and Japan should depress expected returns. Moreover, rising inflation in the US is likely to lead to negative cash returns on a real basis in 2017.

David Jane, manager of multi-asset portfolios, Miton

Equities

We are broadly constructive on equities given the favourable economic environment of accelerating growth and leading indicators in most regions of the world. The strong US outlook leads us to be positive on US equities. The strength of demand in the world’s largest economy, and much lower valuations in the exporting economies Europe and Japan, also encourages us to be positive on European and Japanese equities. The outlook is more nuanced in emerging markets, with strong US demand and a recovering Chinese market providing a healthy backdrop, slightly dampened by the risk of future trade negotiations and a stronger dollar.

Bond yields

While rising inflation might mean we would expect negative returns from bonds, as yields tend to rise as inflation increases, we are not so negative. We would expect only modest rises in government bond yields in the coming months, as policymakers remain committed to unusual policy measures. In terms of corporate bonds, spreads are at extremely low levels compared with history, so caution is warranted. We prefer short-dated, medium-quality corporate bonds for a fair yield with low risk of loss.

Commodities

In an inflationary environment we would generally expect gold to perform well, but until recently this has not been the case. We retain a modest exposure to the precious metal as a hedge against rising volatility and uncertainty, but in a benign economic environment some of the shine has gone off gold. The outlook for base metals continues to improve as economic growth accelerates and supply is more constrained than before. Oil is in oversupply but the biggest producer, Saudi Arabia, has a strong need to keep prices elevated for internal financial reasons, so we would expect oil to continue to trade close to current levels.

Property 

The Brexit uncertainty and the rise in bond yields in the subsequent period has weighed heavily on UK property. But we would expect this to moderate quite soon as we do not expect bond yields to rise greatly from here in the short term. Meanwhile, rising inflation and economic growth makes the outlook for rental growth quite positive.

Cash

We are positive on many other asset classes and have plenty of investment options elsewhere. We are therefore currently neutral on cash.