Standard Life Investments

Tactical Asset Allocation

We build our TAA funds including bonds, equities, commercial property and other assets looking over a 12-month time horizon. Our decision-making sequence is first to consider the outlook for each asset class (e.g. government bonds), followed by views within that market (e.g. the US versus Europe, or European core economies against peripheral countries). This table shows our more and less favoured markets around the world.

February 2019

Government BondsWe see most government bonds as generally unattractive and yield pick-up is not sufficient.Underweight
UK GiltsWhile the economy is slow growing, the Bank of England is still warning about future interest rate increases.Neutral
US TreasuriesRecent weak US economic data has prompted dovish comments from the US Federal Reserve. US Treasury yields have fallen significantly over recent months, near the bottom of a range, pushing them to unattractive levels. Underweight
European CoreEurozone rates remain extremely low in the face of economic weakness. As such, they remain a good funding source.Underweight
European PeripheryThe spread between peripheral and core European government bonds is quite wide. However, we are cautious in view of political risks. Neutral
JapanJapanese government bond yields are very low compared with other markets, still held down by very strict yield curve control from the Bank of Japan despite the new flexible target.Underweight
AustraliaRecent Australian data shows further weakness. We remain long of government rates.Overweight
UK Index LinkedReal (inflation-adjusted) yields are the lowest (least attractive) among major developed economies. Inflation expectations have been fully priced into this market. Neutral
US TIPSThis market provides downside protection as and when investors look for a safe haven. It also provides a degree of protection against any future inflation surprises.Overweight
Corporate BondsThe spread between corporate debt and government bond yields has widened, offering some selective value. Overweight
UK Investment GradeSpreads have widened but we still see credit as vulnerable to economic shocks or upward surprises to gilt yields. Neutral
US Investment GradeSpreads are wider and provide modest protection should the US economy weaken materially. Underweight
Euro Investment GradeEuropean investment grade spreads are wider but the total return looks modest. Underweight
US High YieldUS high yield spreads have widened but not quite to the levels where we would be buyers.Neutral
Euro High YieldEuropean data has disappointed, suggesting further delays to interest rate hikes. Furthermore, net leverage in high yield companies has fallen as they have deleveraged. Both these factors are supportive for European high yield spreads. Overweight
Emerging Market (Hard Currency)Dollar-denominated debt is at attractive spreads to Treasuries and all-in yields, despite challenges in some of the larger emerging market (EM) economies.Overweight
Emerging Market (Local Currency)A lot of bad news is now priced into local currency debt following sharp currency and spread corrections.Overweight
EquitiesGlobal profit growth in the high single digits provides fundamental support at a time of relatively depressed investor sentiment.Overweight
UKThe UK trades at cycle-low valuations, so we are now neutral. Brexit weakness would support the equity market via a lower pound. Neutral
USHealthy macroeconomic conditions support the market and an earnings slowdown is largely priced in. Overweight
Europe ex. UKEconomic expansion has faltered recently but valuations are supportive for corporate profits. Currency appreciation and peripheral political risks continue to restrain interest in stocks.Neutral
JapanThe market remains attractive as easy monetary policy and fiscal stimulus are helped by efforts to improve corporate governance, share buybacks and business investment. However, yen strength periodically remains a concern.Overweight
Developed Asia ex. JapanThe market is vulnerable to policy tightening in China and worries about trade tensions. However, it is relatively inexpensive. Neutral
Emerging Market EquityThe asset class has discounted much of the China trade risks. Valuations have improved and investor positioning is more attractive. Overweight
PropertyWe prefer real estate investment trusts rather than direct investment in commercial property globally.Overweight
UK The real estate cycle is at a mature stage and limited further capital growth is expected. Income remains attractive, although risks are elevated should the UK enter recession or political uncertainty surges.Neutral
USVacancies are low across most sectors and markets, although the sizeable retail sector is coming under more pressure from the rise in e-commerce. Neutral
EuropeStronger economic growth and low levels of new supply support the market. The cautious ECB policy stance helps valuations. Overweight
CommoditiesCommodities are very sensitive to Chinese policy tightening. Some commodities, such as oil, face an uncertain demand/supply balance.Neutral
Cash and CurrencyWith global interest rates still extremely low, we still see better opportunities in risk assets.Underweight
DollarWe expect US growth to slow and current positioning is extreme. We therefore downgraded our view. Underweight
EuroThe euro is less attractive than other major currencies, with concerns over Italy and European politics in general. Underweight
YenAn overweight position in the yen, traditionally a safe-haven currency, acts as a portfolio diversifier if global activity continues to disappoint.Overweight
SterlingBrexit concerns have driven sterling lower. Short of a disorderly Brexit, sterling looks undervalued. Overweight