Positive on equities, upgrading commodities

Schroders’ multi-asset team believes the macroeconomic backdrop remains supportive for risk assets, although valuations and concentration risks are increasingly challenging. It maintains a preference for equities. Schroders is managing inflationary and fiscal risks through allocations to gold, commodities and an underweight position in US Treasuries.

At first glance, the baseline scenario of Schroders’ multi-asset team has moved closer to a “Goldilocks” environment, characterised by resilient growth and moderating inflation. However, it continues to see risks tilted toward inflation. Labour market conditions remain solid, the economy is running above potential, and a dovish-leaning Federal Reserve (Fed) combined with sizeable fiscal stimulus points to a reflationary backdrop. The nomination of Kevin Warsh as the next Fed Chair introduces uncertainty, particularly around the future path of the Fed’s balance sheet. While this raises legitimate medium-term questions, Schroders’ multi-asset team believes it is too early to draw firm conclusions regarding either the direction of policy or the feasibility of executing a more aggressive balance sheet strategy.

With recession risk low, inflation contained - at least in the near term - and corporate earnings continuing to drive returns, Schroders’ default position remains constructive on equities. The multi-asset team is shifting the expression of its US overweight away from mega-cap growth and toward broader and more cyclical exposures - such as industrials and financials - that benefit from a strong US growth environment. Schroders also favours Value outside the US, particularly in Europe and Japan, where valuations remain more compelling and earnings sensitivity to global reflation is attractive.

Long position in broad commodities

This month, Schroders re-entered a long position in broad commodities, which it expects to be primarily driven by higher oil prices and firmer industrial metals. This allocation should perform well in either a supply-driven shock scenario or in an overheating economy. Schroders remains long gold despite recent volatility, as it expects continued structural demand from emerging market central banks and sees it as an important diversifier against fiscal and geopolitical risks.

Schroders maintains its bias towards short duration (i.e. shorter maturity) bonds, reflecting its above-consensus growth outlook and the potential balance sheet risks associated with a Warsh-led Fed. At the same time, it acknowledges that his nomination may reduce the perceived risk of a loss of Fed independence and could alleviate pressure on the US dollar in the near term. While Schroders continues to believe that the medium-term de-dollarisation trend remains intact, it has neutralised its long EUR/USD position as many of its existing exposures - such as emerging market local debt, gold and commodities - would already benefit from renewed USD weakness.

A detailed overview of Schroders' positioning across different asset classes can be found here.

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