Our House View

June 2017

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

If you would like details of how the House View applies to other UK based funds and funds based in other parts of the world, please contact your local Standard Life Investments representative.


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. 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 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 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. 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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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 expansionary fiscal policies. 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. 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. Moved to NEUTRAL
European European property continues to perform well in a global context. Yield compression is beginning to become a smaller component of capital growth as spreads tighten, 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. Although supply is still mounting, 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 The US dollar is supported by tighter monetary policy but faces valuation concerns. 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. 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. Moved to LIGHT
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Key Issues

The global economy is expanding, helped by a supportive monetary and fiscal landscape. As inflation pressures look restrained, partly due to weaker commodity prices but also structural headwinds from globalisation, so central banks in the US, Europe and China are expected to be cautious in their monetary tightening into 2018. The recovery is broadening out, as shown by improvements in global trade. Stronger company profits enable businesses to expand their hiring and investment plans. Some 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. An example of political uncertainty is 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 in 2017, 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.

Sustainable yield also remains a key investment theme, in an environment where future interest rate moves will be limited among the major economies. 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, while there are some decent prospects in Asia. Property combines yield with some growth, which is a 'sweet spot' in terms of investment preferences.