Standard Life Investments

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.

October 2017

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

Government bonds
US TreasuriesTighter labour markets and rising wages give the Federal Reserve the rationale to continue adjusting monetary policy, with upward pressures on core inflation a key signal for more aggressive action.LIGHT
European Bonds Bonds are not well supported, as the improvement in activity across more economies allows the ECB to plan policy tightening. However, markets are overpricing future inflationary pressures.LIGHT
UK GiltsThe outlook for interest rates remains mixed while the economy faces both higher inflation and slower economic activity. Regulatory driven flows support yields but there are valuation concerns.NEUTRAL
Japanese BondsThe central bank is still attempting to reflate the economy with its QE and yield curve control policy alongside negative short-term rates. The absence of yield makes this asset class relatively unattractive.LIGHT
Global Inflation-Linked DebtInflation is generally well contained globally with breakevens largely reflecting this. There is more potential downside for European inflation markets but the US could re-price higher. UK inflation appears fully priced in.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 spreads over US Treasuries are no longer attractive.HEAVY
Corporate bonds
Investment GradeQE 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 DebtUS yields are attractive and the asset class can deliver a positive total return even with moderate spread widening. European spreads are approaching their pre-crisis lows. The asset class can be subject to overcrowding.HEAVY
Equities
US Equities The market is expensive on multiple valuation metrics and monetary policy is neither a headwind nor tailwind. Fiscal reforms are supportive, although political uncertainty is not. The improving macroeconomic environment can feed corporate profits.NEUTRAL
European Equities Corporate earnings are improving following a widespread pick-up in economic growth across the region and stronger international trade flows. Investor sentiment is positive with sizeable inflows from overseas buyers.HEAVY
Japanese Equities The market looks attractive as easy monetary policy and fiscal stimulus are helped by efforts to improve corporate governance, share buybacks and business investment. However, yen strength periodically remains a concern.NEUTRAL
UK Equities UK economic growth expectations are 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 policy tightening risks curbing fixed asset investment and property demand, which is a large driver for the region.NEUTRAL
Emerging Market Equities Global growth improvements, especially for key sectors such as Asian technology, support the asset class. A tightening bias in China is a headwind, but little is expected in advance of the party congress.HEAVY
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 grows.NEUTRAL
EuropeStronger economic growth and low levels of new supply support European property. However, valuations are not as compelling against the backdrop of a less supportive stance by the ECB.NEUTRAL
North AmericaThe US market has low vacancies across most sectors and markets, although the sizeable retail sector is coming under more pressure. Elsewhere, new construction is mostly in check, providing a window for rental growth.NEUTRAL
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 vacancies and healthy tenant demand.NEUTRAL
Other assets
Foreign Exchange The major currencies are within broad valuation ranges. The yen can act as a diversifier against the risk of a noticeable decline in global activity or a serious political shock.Neutral $, €, ¥, Moved to Neutral £
Global Commodities While the slow improvement in global growth supports commodities, they are very sensitive to Chinese policy tightening and some commodities, such as oil, face a difficult demand/supply balance.NEUTRAL
Cash
With global yields still extremely low, we still see better opportunities in risk assets.LIGHT

Key issues

Economic forecasts for global growth in late 2017 and into 2018 are being revised modestly higher, as consumer spending, business activity, capital spending and trade data improve across Europe, North America and Asia. At this phase of the business cycle, companies are managing the pressures on corporate margins, underpinning strong profits growth that is proving supportive for global equity markets. There is the potential for an additional boost if the Trump administration can push ahead with major tax cuts, although political obstacles are clear. This improvement in corporate cashflow is more than offsetting relatively expensive valuations in many markets. Our favoured equities are Europe and selected emerging markets, and to a lesser extent the US and Japan. Brexit uncertainty can weigh on UK equities, so we retain a small underweight position.

Turning to fixed income, although underlying inflation trends remain moderate, central banks continue to expect a pick-up in headline inflation into 2018 as labour markets inexorably tighten. On this basis, more central banks are considering tightening monetary policy through withdrawing QE or actual rate increases. Our favoured market is emerging market local currency debt, where spreads look to provide adequate compensation for investment risk, even if growth in China is constrained. Furthermore, we are overweight in US high-yield bonds, as its attractive yield can offset any rise in underlying government markets. It is practical to own some duration in portfolios, whether through fixed income, real estate, currency or certain equities, although the benefits from doing so are likely to be limited. Accordingly, we are neutral to underweight in most government and corporate bond markets.

Within commercial real estate, we have taken steps to neutralise our positions across all the major regions. Although global property remains an attractive asset class in a world of moderate growth, valuations mean that the bulk of the future return should come from rents. We maintain a small overweight position in European ex-UK REITS, as the region is further behind in the economic cycle than other developed markets and should benefit as the domestic economic growth environment improves.

Among the major currencies, we hold a small overweight position in the Japanese yen, are neutral in the euro and the US dollar, and favour a small underweight position in sterling. This partly reflects cross-border capital flows, partly valuation measures, and partly to act as a diversifier – for example, the yen usually benefits when investor uncertainty falls and provides protection due to its characteristics as a longer duration asset. Furthermore, the FX market was an early mover to price in potential policy tightening by central banks.

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.