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.

July 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 and rising wages give the Federal Reserve the rationale to continue tightening policy. Markets are not fully pricing in inflation pressures. Moved to LIGHT
European Bonds Bonds are not as well supported, as the improvement in economic growth could force the ECB into tightening policy while political pressures could resurface. Markets, however, are over-pricing inflationary pressures. LIGHT
UK Gilts The Bank of England has delivered significant easing measures as the impact of rising inflation on household incomes should cause the economy to slow. Long-term valuations are expensive, especially after the recent sterling moves. NEUTRAL
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 While we see inflation as generally well contained globally, there are varying opportunities in different markets. In particular, UK breakeven rates look relatively high and US rates relatively low. 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 attractive spreads over Treasury debt. 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. 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. NEUTRAL
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Equities
US Equities Equities have rallied on the back of improved global economic conditions and potential fiscal easing and deregulation. While dividends and buybacks are supportive, risks valuations are fairly full. HEAVY
European Equities Corporate earnings are improving on the back of a widespread pick-up in economic growth across the region, while investor sentiment becomes more positive. Concerns remain over some banking systems and the lack of strong credit growth. HEAVY
Japanese Equities The market looks more attractive, as easy monetary policy and fiscal stimulus for 2017 are helped by efforts to improve corporate governance, share buybacks and business investment. NEUTRAL
UK Equities The UK economy is weakening and Brexit remains a longer-term threat. 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 supports this market, but Chinese tightening risks curbing property demand, which is a large driver for the region. NEUTRAL
Emerging Market Equities While emerging markets are attractive in the face of a global economic pick-up, the current Chinese tightening bias makes us Neutral on this asset class. 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. NEUTRAL
European European property continues to perform well in a global context. Yield compression is essentially over as spreads have tightened, while stronger economic growth and low levels of supply are supporting healthy income growth. HEAVY
North American The US market has low vacancies across most sectors and markets, with the notable exception of retail malls, and construction is mostly in check, providing a prolonged window for rental growth. HEAVY
Asia Pacific An attractive yield margin remains but yields have bottomed in most markets. Income returns are driven by modest rental growth on the back of low vacancy, healthy tenant demand and resilient economies. NEUTRAL
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Other assets
Foreign Exchange Better global growth tends to encourage flows out of the US dollar. The euro is no longer a sell, while the yen is cheap. Sterling acts as a shock absorber for Brexit. Heavy ¥, Neutral $, €, £
Global Commodities While global growth generally supports commodities, they are very sensitive to Chinese policy and some commodities, particularly oil, face excess supply. NEUTRAL
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Cash
With global yields still extremely low, we still see better opportunities in risk assets. LIGHT
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Key issues

The global economy continues to expand, as shown by positive trends in trade, capital spending and hiring, helped by still supportive monetary and fiscal policies. While central banks in the US, Canada and China are raising interest rates, and QE programmes should be restrained in the US and Europe into 2018, it is clear that central banks will be cautious in their monetary tightening. Underlying inflation pressures look restrained by the degree of spare capacity as well as the impact of technological developments. Political risk remains high in most regions, summarised by the degree of uncertainty about whether the US government pushes ahead with material changes to tax, trade or foreign policies.

We balance a desire for selected growth opportunities with a focus on sustainable yield. As the profits outlook appears better, we have accepted more equity risk. US stocks appear well supported, 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.

Among the major currencies, we have a small overweight position in the Japanese yen and small underweight positions in the US dollar and sterling. This is partly on valuation grounds and partly to act as diversifiers – for example, the yen usually benefits when investor uncertainty falls.

Elsewhere, the House View remains overweight in income-producing assets such as real estate and emerging market debt. We expect only modest returns from government bonds in 2017, although the downside is limited by the lack of major inflation pressure. Valuations on corporate bonds have become stretched.

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. Meanwhile, there are some decent prospects in parts of 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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