Investment Adviser asks three experts for their views on the outlooks for various asset classes over the next three months
Steve Waddington, portfolio manager, multi-asset strategy group, Insight Investment
The cyclical momentum in global equities has slowed since the start of the second quarter amid a stabilisation in fundamental or ‘hard’ economic data. While the general global growth backdrop remains supportive, it could be argued that valuations are rich in some regions. We have maintained our cyclical bias and have directional exposure in areas where we find valuations more attractive. We also seek to capture specific idiosyncratic range-bound or breakout opportunities within total return strategies – which, in aggregate, aim to generate returns that are less dependent on market direction.
We expect the negative correlation between government bonds and equities to persist in the medium term. This, together with a lack of inflationary pressures, suggests the space will retain an important role as a diversifying asset within portfolios. A normalisation in the volatility of the asset class has also helped. Similar to equities, developed market credit spreads have been supported by the general pick-up in cyclicality as expectations of improving corporate profits and falling default rates have influenced prices. We think emerging market debt remains vulnerable to US treasury yield volatility and US political uncertainty in the medium term but we believe the asset class provides some value opportunity.
The recent gyrations in commodity prices have served as a reminder of the impact supply-side considerations can have on particular commodities. But cyclical forces should be a key determinant of the path of the broader commodity complex in the months ahead.
Certain types of real assets can provide an alternative, diversifying exposure should inflationary risks build further. Infrastructure continues to be an area where we see opportunities. The outlook for long-duration infrastructure assets with predictable income streams and some inflation linkage remains attractive. Conversely, mainstream global-listed infrastructure indices tend to have a high economic sensitivity and a higher beta to global equities, which is less attractive and highlights the importance of targeting specific infrastructure exposures. Securities that have an operational bias and strong, long-term cashflows tend to have a lower beta to global equity markets, helping to further diversify a portfolio.
Our range of total return strategies aims to generate returns that are less dependent on market direction. Year to date we have seen some strong contributions from our range-bound and breakout strategies, which represent holdings where we expect relevant markets to trade within specified ranges, or break through their historic ranges. We see a continued difficult environment for currency opportunities in total return strategies. Volatility since the start of 2017 has led us to run lower-than-average risk in less directional strategies. For dividend strategies, we typically look to add during periods of market stress, but the constructive market environment means we have reduced exposure as valuations have become less attractive.