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The House View process provides a consistent macroeconomic framework to analysing global financial markets.
Our Head of Global Strategy, Andrew Milligan, introduces the latest edition of Global Outlook, a summary of our House View.
Standard Life Investments’ Global Strategy team provide regular analysis of the key economic data that has been influencing financial markets.
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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.
The following portfolio is based upon a global investor with access to all the major asset classes.
|US Treasuries||While market stress and safe-haven flows support Treasuries, tighter labour markets, rising inflation and the upward trend in wages give the Federal Reserve the rationale to continue hiking rates throughout 2017 and 2018.||LIGHT|
|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 delivered significant easing measures as uncertainty related to the EU referendum outcome is expected to cause the economy to slow. However, valuations are expensive.||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||We prefer US dollar-denominated debt, on both valuation grounds and the protection from currency movements it provides. Yields remain attractive although the asset class is vulnerable to aggressive US rate rises.||HEAVY|
|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.||NEUTRAL|
|High Yield Debt||The hunt for yield is driving more investors to this asset class, although overcrowding remains a risk in some sectors, especially in the US when monetary policy is being tightened.||HEAVY|
|US Equities||Equities are buoyant on the back of promised fiscal easing and business deregulation. While valuations are not historically attractive, dividends and share buybacks plus expected tax cuts are still supportive for cashflows.||VERY HEAVY|
|European Equities||Corporate earnings are improving on the back of a widespread pickup in economic growth across the region. Concerns remain over some banking systems, the lack of strong credit growth and the upcoming election cycle.||NEUTRAL|
|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 remained 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 have a positive feed through due to trade linkages, but 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|
|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.||LIGHT|
|European||Core markets continue to offer attractive relative value in light of the low interest rate environment supported by QE, while recovery plays are showing consistent capital value growth.||HEAVY|
|North American||The US market should benefit from an improvement in economic growth, although some Canadian property faces headwinds from an interest-rate sensitive consumer and significant office construction.||HEAVY|
|Asia Pacific||An attractive yield margin remains, but markets are divergent. Returns are driven by rental and capital value growth in Japan and Australia, but weakening elsewhere. Emerging Asia markets are risky.||NEUTRAL|
|Foreign Exchange||The US dollar has rallied following the US election but will benefit from a steady tightening of monetary policy; Europe looks less well placed than Japan to cope with the next phase of currency pressures; sterling acts as a shock absorber after the EU referendum.||Heavy $, Moved to Heavy ¥, Light €, Moved to 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|
|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.||NEUTRAL|
The global economy is expanding, helped by a supportive monetary and fiscal landscape. In turn, this is leading to a more positive profits cycle. There are signs that global trade is starting to improve, while companies are expanding their hiring and investment plans. Economists and analysts are beginning to upgrade their forecasts for 2017. An important headwind remains the political situation in many countries, with the rise of populism leading to more concerns about whether governments can push ahead with structural reforms. In addition, the spate of European elections could add to political uncertainty for investors and raise more concerns about the future of the Eurozone. Meanwhile, the potential exists for serious changes to global trade flows depending on policies from the US government.
Accordingly, we are balancing 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 the most dependable, especially if the government lowers corporate taxes, but also command high valuations. Europe, Japan and selected emerging markets look set to benefit from higher operating leverage to global growth, helped by weaker currencies. In foreign exchange markets, we remain positive on the US dollar given the underpinnings of relative growth and therefore tighter monetary policy versus the rest of the world. Further ahead, however, the over-valuation of the US dollar will become more of a factor.
Sustainable yield also remains a key investment theme, with an emphasis on sustainability in those markets, credit or equity, where payout ratios are stretched. The House View remains overweight in income-producing assets such as high yield bonds and emerging market debt. We expect only modest returns from government bonds in 2017. This is due to relative valuations and significant upward pressure on headline inflation from commodity prices and, in some cases, wages growth.
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.
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
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.Back to top