Latest multi-asset investment views : overweight in equities and commodities
After a month of significant geopolitical turbulance, a volatile environment is likely to remain, says Patrick Brenner, Chief Investment Officer, Multi-Asset, Schroders. Find out more in his latest multi-asset views below.
We came into the Iran war positioned for a benign cyclical environment with a bias towards inflation risk, given expectations of fiscal stimulus and a focus on supply chain resilience in a deglobalising and geopolitically tense world. This combination of views led us to an overweight position in equities and commodities and an underweight position in bonds.
We cannot predict what will happen next in the Middle East. We have decided to take profits on our broad commodity position as, after the spike in oil prices, the outlook is more balanced from here. That doesn't mean that volatility is over however as investors now need to determine how central banks might react to this stagflationary shock.
Bonds
We don't think the situation is as extreme as 2022 in that the starting level of interest rates is considerably higher and the underlying level of inflation is lower. Nevertheless, we think there is further upside in bond yields and would expect the US 10 year to rise to 4.5%. We also believe there is upside to the US dollar as the US is less vulnerable to the energy shock. We also turn negative on US investment grade credit as current spreads offer little protection against the potential for stagflationary risks and increasing issuance (consistent with late cycle dynamics).
Equities
We maintain our overweight position in equities but have decided to close the overweight to international value stocks as financials remain vulnerable to rate concerns and the US is likely to be more resilient to any protracted oil price spike.
Gold
We remain long gold despite recent volatility, as we expect continued structural demand from emerging market central banks and see it as an important diversifier against fiscal and geopolitical risks. We also maintain our long position in local EMD given attractive real yields and better debt dynamics.
In conclusion
We still believe there is upside to equities as we see low risk of recession. However, we acknowledge the risk of protracted energy supply disruption and so we have reduced the cyclicality of our equity exposure and increased our exposure to the US dollar. We have monetised our long commodity hedges but remain underweight bonds as the level of yields poses a valuation risk to equities.
The Main Asset Classes in detail
🟢 Long / positive
🟡 Neutral
🔴 Short / negative
🔼 Up from last month
🔽 Down from last month
Main Asset Classes
🟢 Equities
We maintain our positive view on equities. We recognise that volatility may remain elevated, however fundamentals remain supportive.
🔴 Government bonds
We remain negative on government bonds, reflecting the view that markets remain too complacent about the inflation risks of an extended conflict in the Middle East.
🟡🔽 Commodities
We took profits on our broad commodities position and have downgraded our view to neutral. Following the spike in oil prices, much of the risk has shifted from acute to potentially chronic.
🔴🔽 Corporate bonds (credit)
We have downgraded our score for credit to negative. This reflects our belief that tight spreads are no longer reflective of prevailing risks in the market.
Equities
🟢 US
We maintain a positive view on US equities despite recent underperformance, with earnings growth and a healthy consumer underpinning growth. We see opportunities both in mega-cap stocks and the broader index.
🟡 UK
We maintain a neutral stance on UK equities. Despite potential resilience to AI disruption, there are few clear catalysts for growth in the UK and political uncertainty continues to weigh on sentiment.
🟡 Europe ex UK
We remain neutral on European equities. Despite a supportive fiscal backdrop, the market faces headwinds due to energy price sensitivity and large banking exposure.
🟡 Japan
We maintain a neutral view, although expectations of additional fiscal support following the recent election may help underpin domestic activity.
🟢🔼 Global Emerging Markets (EM)1
We have upgraded our view on EM equities to positive, with a particular focus on Asia, where countries with greater exposure to the technology sector stand to benefit from tailwinds around the AI theme.
🟡 Asia ex-Japan: China
We remain neutral, with few catalysts for growth in the near-term. Exports have been strong since the start of the year, but domestic demand remains weak.
🟢🔼 EM Asia ex China
Export-oriented Asian markets benefit from US strength and industrial resilience, with relatively fewer geopolitical worries than China.
1Global Emerging Markets includes Central and Eastern Europe, Latin America, and Asia.
Government bonds
🔴 US
We remain negative on US Treasuries. The potential for energy prices to remain high combined with solid growth create upside risk for yields.
🟡 UK
We remain neutral on gilts. The rise in oil prices caused by the Middle East conflict has reduced the likelihood of previously anticipated rate cuts by the Bank of England.
🟡 Europe
We retain a neutral stance on European government bonds. As one of the main importers of Gulf oil, the region is vulnerable to energy price rises.
🟡 Japan
We remain neutral on JGBs. While fiscal expansion continues to support growth, policy normalisation and global reflation risks temper their attractiveness at current levels.
🟡 US inflation-linked bonds
While inflation has moderated, risks are skewed to a second wave particularly as the impacts of the Middle East war push energy prices higher.
🟢 Emerging markets local currency bonds
We remain positive on EM local debt. The combination of attractive carry and improving fundamentals supports EM local returns.
Investment grade credit
🔴US
We maintain our negative view on the sector, with spreads remaining tight and the potential for recent stress in private credit to spill over into public markets.
🟡 Europe
We prefer Europe over the US but remain neutral overall. Valuations are less stretched than in the US, however Europe has greater sensitivity to energy price rises.
🔴🔽 Emerging markets USD
We have downgraded our view, as regional exposure to the Middle East and Asia means the risk of spreads widening is greater than current levels currently reflect.
High yield bonds (non-investment grade)
🔴🔽 US
We have downgraded the sector to negative, owing to exposure to AI related companies and susceptibility to a change in technicals.
🔴🔽 Europe
We have downgraded to negative, with valuations expensive and the conflict in Iran posing a risk due to sensitivity to energy prices.
Commodities
🟡🔽 Energy
We have taken profits on our energy position as oil prices have moved significantly higher since the start of the month. We do not believe the current situation and level of prices is sustainable and so we switch to neutral while we wait for clarity on the duration/outcome of the war.
🟢 Gold
We remain positive as demand remains high. Despite recent price volatility, the medium term trend of central bank buying continues, with Malaysia recently increasing their gold reserves for the first time since 2018.
🟡 Industrial metals
There is potential for supply side disruption to aluminium due to the Middle East conflict, however we do not see evidence of enough demand for a wider range of metals to justify upgrading our view.
🟡 Agriculture
With a generationally high supply of grains, agriculture is likely to be a laggard among commodities, although agriculture does have some sensitivity to any closure of the Strait of Hormuz, specifically in the supply of fertiliser.
Currencies
🟢🔼 US $
We have upgraded our view on the dollar. The current uncertainty in the Middle East and the US’s position as a net oil exporter means the region is less exposed to the current supply constraints. In addition, cyclical dynamics could be a tailwind to the dollar in the near term.
🟡 UK £
We remain neutral on sterling. The macro backdrop remains weak, and the likelihood of anticipated rate cuts from the Bank of England has reduced following upward pressure on inflation due to the rise in energy prices.
🔴🔽 EU €
We have downgraded the euro to negative. We expect the currency to be the main source of selling as investors increase their exposures to the dollar, particularly as Europe has a greater sensitivity to the energy price shock.
🟡 CNH ¥
We remain neutral. Inflation has moderated, which may be supportive. China also seems relatively insulated from energy price shock, due to coal, storage and link to Russia.
🟡 JPY ¥
We maintain a neutral view on the yen, given the gradual pace of policy normalisation and broadly balanced near-term currency dynamics.
🟡Swiss franc ₣
We stay neutral on the Swiss franc, as safe-haven support in a weaker dollar environment is offset by intervention risk and less attractive entry levels.
