House View, September 2019
- We remain underweight global equities, but continued stimulus and an economic backdrop that is not catastrophic mean this is nuanced by neutral positions in some regions. We favour stocks of companies that have pricing power as well as those showing healthy dividend growth and low leverage.
- We are neutral US Treasuries as a way to protect portfolios, but underweight negative-yielding European and Japanese bonds. We remain cautious about ongoing yield compression, preferring to focus on quality and to limit duration. We are underweight US high yield, where leverage is high and default levels have been creeping up.
- The opportunity cost of holding gold, on which we remain neutral, although bullish sentiment could limit short-term gains. The hunt for yield is boosting the appeal of private capital investing, while event-driven hedge funds could continue to perform.
- Although oil supply is currently quite tight, we continue to expect the Brent oil price to fall further towards USD50 in early 2020, and to remain close to this level thereafter due to oversupply and weak global demand.
- Likely ECB easing means we have lowered our stance on the euro, while we see continued trade disputes as increasingly tensions surrounding currency valuations in general. The Trump administration could well try to include currency clauses in future trade agreements and to put further pressure on the Fed in a bid to cap dollar strength.
- The low yield offered by long-term bonds is making equities look relatively more attractive in spite of rich valuations. But given continued trade tensions, we maintain a slightly negative stance on developed-market equities.
- In an uncertain environment, prioritising stock-specific stories has worked well, a trend we expect to continue across sectors. Expectations this year remain subdued, but earnings per share growth expectations are stable for 2020, showing some optimism that macro issues will not impact earnings any further. This remains to be seen.
- Neither sentiment nor fundamentals appear supportive of EM equities at the moment. Earnings expectations continue to deteriorate in USD terms, driven by signs of a general economic slowdown and currency weakening. We therefore maintain our underweight stance.
- Tactical trading managers have delivered solid returns year to date, thanks to strong complementary trends in gold and fixed income. Going forward, we believe that these managers will continue to add value by capturing major macro trends.
- We expect the Bank of England and the ECB to ease monetary policy in the coming months and Fed to have cut rates three times by year’s end. As we think ongoing risks are unlikely to fade soon, we have revised sharply down our year-end yield targets.
- We remain neutral on euro credit, as we see the technical and fundamental picture remaining supportive of spreads. We see cracks appearing in the energy sector, comforting our underweight stance in US high yield.