Our House View
September 2010
The following portfolio is based upon a global investor with access to all the major asset classes.
If you prefer, you can access a text-only version of our house view.
Government bonds
US Treasuries |
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NEUTRAL |
Yields are supported by a backdrop of muted inflation pressures, which will limit any interest rate increases into 2011, but valuations and fiscal pressures are becoming more of a concern. |
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European Bonds |
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NEUTRAL |
Still well supported by an environment of moderate economic growth and restrained inflation, but safe haven flows on European debt servicing problems have pushed some markets to expensive levels. |
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UK Gilts |
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NEUTRAL |
Concerns about the economy’s fiscal position and sizeable gilt supply in the years ahead make us cautious but interest rate increases remain unlikely for some time. |
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Japanese Bonds |
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NEUTRAL |
Low Japanese government bond yields mean this asset class is increasingly being used as a funding source for other investments including overseas government bond markets. |
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UK Inflation-Linked Debt |
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NEUTRAL |
There are inflation risks in the medium term from central bank quantitative easing but valuations of inflation-proofed debt need to be examined carefully. |
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Corporate Bonds
Investment Grade |
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VERY HEAVY |
Spreads over government bonds are still historically wide, although not as attractive as seen last year. Strong corporate cash flow supports the improvement in bond default rates. |
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High Yield Debt |
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VERY HEAVY |
The asset class is benefiting from an attractive carry, improving corporate cash flow and a peak in the default cycle as the global economy recovers. Investors still need to be aware of selective default risk and periodic risk aversion. |
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Equities
US Equities |
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NEUTRAL |
US equities are supported by improving corporate cash flow into 2010 on the back of strict cost control but the upside is limited by the consumer debt and housing market overhangs restraining domestic demand. |
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European Equities |
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LIGHT |
Profitability is restrained by less cost cutting than seen in the US and UK, plus the impact of tight fiscal policy on economic growth, albeit some sectors are supported by their exposure to emerging market economies. |
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Japanese Equities |
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LIGHT |
Helpful exposure to the Asian and US economies is offset by weak domestic dynamics and limited cost cutting; government action has so far been unsuccessful in stimulating consumer spending or ending deflation. |
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UK Equities |
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NEUTRAL |
The market can make headway, supported by valuations and the benefits of sterling’s depreciation on overseas earnings, but faces headwinds from weak real income growth and fiscal tightening. |
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Developed Asian Equities |
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NEUTRAL |
We are cautiously selective on Asian economies benefiting from strong Chinese growth but wary of inflation pressures building in some countries unless central banks take firm action to dampen liquidity. |
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Emerging Market Equities |
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NEUTRAL |
Some markets are benefiting from the upturn in commodity demand and upgrades to sovereign debt ratings. Others still face external financing problems or valuation concerns. |
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Property
UK & European |
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HEAVY |
We are selectively Heavy with a particular focus on supply-constrained office markets, e.g. London & Paris, and higher-yielding central European logistical property. |
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North American |
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NEUTRAL |
We see the best prospects in underdeveloped industrial locations in Canada and the cyclical US office markets where future supply is at 30-year lows. |
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Asia Pacific |
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LIGHT |
Excessive supply in certain Asian markets, e.g. China, will hold back growth. Continuing our global theme, the mature office markets offer robust relative returns based on strengthening demand and a paucity of new construction. |
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Other Assets
Foreign Exchange |
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HEAVY $ and £ vs LIGHT € and ¥ |
Interest rate differentials, divergent growth prospects, and political and regulatory drivers are becoming important differentiators for global capital flows. |
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Global Commodities |
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NEUTRAL |
Strong demand for industrial commodities will be led by infrastructure projects in emerging economies, but oil and soft commodities will eventually see new supply come on stream. |
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Cash
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VERY LIGHT |
Central banks in the major economies will keep monetary policy very loose into 2011 as inflation pressures remain weak due to excess capacity and high levels of unemployment. |
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Key Issues
We are more positive on sustained corporate profits growth, despite a muted economic upturn in the developed economies. Financial markets will have to navigate changing expectations of the macro backdrop over time as political, fiscal and regulatory headwinds impact.
Central banks are unlikely to tighten monetary policy in most OECD economies until well into 2011 in the face of weak inflationary pressures and fiscal tightening.
We continue to favour sustainable yield in the current environment, from sources including corporate bonds, commercial property and equity income. We do not favour low-yielding assets such as cash.
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.
The Global Investment Group (GIG) 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.
