Our House View

The House View process provides a consistent macroeconomic framework to analysing global financial markets. It creates a clear forward-looking strategic direction for all of our investment decisions, particularly asset allocation within the traditional balanced funds but it also underpins our absolute return strategies. The House View is formed by the Global Investment Group (GIG) on the basis of internal research from the Global Strategy Team, covering a range of macro-economic, behavioural, liquidity and structural drivers in each of the major economies and markets.

April 2017

The following portfolio is based upon a global investor with access to all the major asset classes.

If you prefer, you can access a text-only version of our house view.

Government bonds
US Treasuries Tighter labour markets, rising wages and inflation give the Federal Reserve the rationale to continue hiking rates. However, the potential for promised fiscal reforms to be delayed or limited in scope can support the market. Moved to NEUTRAL
European Bonds As growth and inflation pick up, bonds are not as well supported. This means the ECB is considering how long to keep monetary policy accommodative. Political stress could periodically affect peripheral and core bond markets. LIGHT
UK Gilts The Bank of England has delivered significant easing measures as uncertainty related to the Brexit negotiations is expected to cause the economy to slow. Long-term valuations are expensive. Moved to LIGHT
Japanese Bonds The central bank is attempting to reflate the economy with its quantitative easing and yield curve control policy alongside negative short-term rates. The absence of yield makes this asset class relatively unattractive. LIGHT
Global Inflation-Linked Debt Inflation levels are expected to increase across developed markets as expansive fiscal policy in the US and Japan, currency weakness in the UK and the rise in commodity prices all feed through into headline rates. NEUTRAL
Global Emerging Market Debt Local currency yields are more attractive due to emerging markets sensitivity to the pick-up in global growth. US dollar-denominated debt is supported by cheap valuations and the protection from currency movements it provides. HEAVY
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Corporate bonds
Investment Grade Debt QE supports UK bonds, but it has driven European yields to unattractive levels. US credit spreads are less attractive as Treasury yields increase and we prefer riskier assets. Moved to LIGHT
High Yield Debt The hunt for yield has driven investors to this asset class, although overcrowding remains a risk in some sectors, especially in the US when monetary policy is being tightened or oil prices are under pressure. Moved to NEUTRAL
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US Equities Equities have rallied on the back of improved global economic conditions and promised fiscal easing and deregulation. While dividends and buybacks are supportive, risks remain over the potential failure to implement fiscal policies. Moved to HEAVY
European Equities Corporate earnings are improving on the back of a widespread pick-up in economic growth across the region and investor sentiment is positive. Concerns remain over some banking systems, the lack of strong credit growth and the upcoming elections. Moved to HEAVY
Japanese Equities The market looks more attractive, as easy monetary policy and fiscal stimulus for 2017 are helped by a cheaper yen driving forward corporate earnings, share buybacks and business investment. NEUTRAL
UK Equities The UK economy has been resilient following the EU referendum but uncertainty remains surrounding its future relationship with the EU. Sterling remains the primary driver of the relative attractiveness of UK companies with overseas exposure. NEUTRAL
Developed Asian Equities The improvement in the global economy will feed through positively because of trade linkages. However, expected US interest rate rises, a stronger dollar and protectionist policies may all offset this effect. NEUTRAL
Emerging Market Equities The outlook for Asia is dependent on US trade policy and the degree of monetary tightening or US dollar strength. An increasing number of emerging markets are seen as attractive, as the improvement in global growth feeds into commodity prices. NEUTRAL
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Real estate
UK The UK real estate cycle is at a mature stage and expectations of further capital growth are limited. Income remains attractive, although risks are elevated should conditions turn recessionary or political uncertainty persists. LIGHT
European Core markets continue to offer attractive relative value in light of the low interest rate environment supported by QE, while recovery plays are showing consistent capital value growth. HEAVY
North American The US market should benefit from an improvement in economic growth, although some Canadian property faces headwinds from an interest-rate sensitive consumer and significant office construction. HEAVY
Asia Pacific An attractive yield margin remains, but markets are divergent. Returns are driven by rental and capital value growth in Australia, but weakening elsewhere. Emerging Asia markets are risky. NEUTRAL
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Other assets
Foreign Exchange The US dollar has rallied following the presidential election and can benefit from a steady tightening of monetary policy. Europe looks less well placed than Japan to cope with the next phase of currency pressures, while sterling acts as a shock absorber after the EU referendum. Moved to Heavy ¥, Neutral $, €, Light £
Global Commodities Different drivers, such as US dollar appreciation, Chinese demand, Middle East tensions, OPEC decisions and climatic conditions, influence the outlook for different commodities. NEUTRAL
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The US election result may mean a faster pace of interest rate rises is necessary should fiscal policy expansion lead to inflationary pressures. Easy policy is expected in Europe, Japan and the UK to revive economic activity. NEUTRAL
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Key issues

The global economy is expanding, helped by a supportive monetary and fiscal landscape. Improvements to global trade show that the recovery is broadening out. As company profits strengthen, so businesses are expanding their hiring and investment plans. Most of the headwinds to this good news look to be political. A rise in populism is leading to more concerns about whether governments can push ahead with structural reforms. The spate of European elections could add to political uncertainty for investors and raise more concerns about the future of the Eurozone. Meanwhile, the potential exists for sizeable changes to tax, trade and foreign policies from the US government.

We balance a desire for selected growth opportunities with a focus on sustainable yield. As the profits outlook appears better in 2017, we have accepted more equity risk. US stocks appear the most dependable, especially if the government lowers corporate taxes, albeit they command high valuations. Europe, Japan and selected emerging markets look set to benefit from higher operating leverage to global growth, helped by weaker currencies. In foreign exchange markets, we have moved to a neutral position on the US dollar on valuation grounds. We prefer the Japanese yen to sterling partly on Brexit concerns and partly as the yen usually benefits when investor uncertainty falls.

Sustainable yield also remains a key investment theme, with an emphasis on sustainability in those markets, credit or equity, where payout ratios are stretched. The House View remains overweight in income-producing assets such as high yield bonds and emerging market debt. We expect only modest returns from government bonds in 2017. This is due to relative valuations and significant upward pressure on headline inflation from commodity prices and, in some cases, wages growth.

In real estate, we find better opportunities outside the UK. In the US and Europe, yields are attractive, rental growth is positive and commercial development remains constrained, while there are some decent prospects in Asia. Property combines yield with some growth, which is a ‘sweet spot’ in terms of investment preferences.

Where foresight meets conviction

Whatever your involvement in the financial markets, you will understand that they present ongoing, never-ending challenges. That’s why we’re focused firmly on the future - anticipating and identifying the next compelling investment opportunities for our clients.

Our House View provides a clear, forward-looking strategic direction for our investment decisions. It’s the crux of all our investment insights, taking into account the many factors that shape the outlook for the major asset classes. It ensures we have a consistent approach to managing market risk across our product range, and acts as a bedrock for the decisions our investment teams take on a daily basis.

How the process works

House View process

The Global Investment Group is the team that collates our House View. After in-depth analysis, the GIG forms a broad view of asset allocation, based on current market drivers and economic forecasts. Across our portfolios, we describe our positions within markets, sectors and stocks as being Very Heavy, Heavy, Neutral, Light and Very Light, relative to the portfolio's benchmark.

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