Standard Life Investments

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 GIG consists of representatives from both Standard Life Investments and Aberdeen Asset Management but its views only apply in the context of Standard Life Investments funds.

February 2018

The following portfolio is based upon a global investor with access to all the major asset classes.

Government bonds
US TreasuriesUS bond markets largely price in federal funds rate hikes, unless there is a major deterioration in inflation. We therefore expect trading to continue in a range.Neutral
European Bonds While the economy is expanding steadily, the ECB has signalled a slow approach to tapering bond purchases against a backdrop of muted inflation. Neutral
UK GiltsThe outlook for interest rates remains mixed while the economy faces both higher inflation and slower economic activity, complicated by Brexit negotiations.Neutral
Japanese BondsOur portfolios are funding other risk positions out of Japanese bonds, reflecting the market with the lowest yield yet strict yield curve control from the Bank of Japan.Underweight
US Inflation Linked DebtThis asset class provides both downside protection against any risk-off moves as well as a degree of protection against any future inflation increase.Overweight
Global Emerging Market Debt Local currency yields are more attractive due to emerging markets sensitivity to the pick-up in global growth, improvements in the balance of payments and attractive spreads to global government bonds.Overweight
Corporate bonds
Investment GradeQE supports UK bonds, but it has driven European yields to unattractive levels. US credit spreads are now tight and provide little protection should Treasury yields increase.Underweight
High Yield DebtUS yields are attractive and the asset class can deliver a positive total return even with moderate spread widening. European spreads are approaching their pre-crisis lows. Overweight
US Equities Improving company profits and proposed tax cuts support the market, with attractive opportunities among the technology and financial sectors, for example.Overweight
European Equities Corporate earnings are improving following a widespread pick-up in economic growth across the region and stronger international trade flows. Euro appreciation continues to restrain interest in European stocks.Overweight
Japanese Equities The market looks 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
UK Equities UK economic growth expectations are weakening and Brexit remains a longer-term threat. Companies with relatively modest growth prospects dominate the FTSE 100 Index.Underweight
Developed Asian Equities The improvement in the global economy supports this market, but Chinese policy tightening risks curbing fixed asset investment and property demand, which is a large driver for the region. Neutral
Emerging Market Equities Global growth improvements, especially for key sectors such as Asian technology, support the asset class. A tightening bias in China may prove to be a headwind.Overweight
Real estate
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 grows.Neutral
EuropeStronger economic growth and low levels of new supply support European property. The ECB’s policy stance also supports valuations.Overweight
North AmericaThe US market has low vacancies across most sectors and markets, although the sizeable retail sector is coming under more pressure. Neutral
Asia Pacific An attractive yield margin remains, but yields have bottomed in most markets. Income returns are driven by modest rental growth on the back of low vacancies and healthy tenant demand.Neutral
Other assets
Foreign Exchange The major currencies are within normal valuation ranges. We currently only favour the yen, which can act as a diversifier against the risk of a decline in global activity.Neutral $, €, ¥ and £.
Global Commodities While the slow improvement in global growth supports commodities, they are very sensitive to Chinese policy tightening and some commodities, such as oil, face an uncertain demand/supply balance.Neutral
With global yields still extremely low, we still see better opportunities in risk assets.Underweight

Key Issues

The world economy looks well placed at the start of 2018, according to a series of business surveys. There are positive signs from a mix of consumer spending, business activity, capital expenditure and trade reports across Europe, North America and Asia. At this phase of the business cycle, companies are managing the pressures on corporate margins, underpinning robust profits growth. An additional boost to company profits for firms with US operations, wherever they are headquartered, will appear as the major package of tax cuts in the US has its effect in coming months. However, recent market corrections show investor concerns about the state of market valuations after the latest phase of the bull market, especially when some signs of higher inflation in the US have worried bond investors. Our favoured equities are Japan and selected emerging markets, and to a lesser extent the US and Europe. Brexit uncertainty can weigh on UK equities, so we retain a small underweight position.

Turning to fixed income, although underlying inflation trends remain moderate, central banks continue to expect a pick-up in headline inflation into 2018 as unemployment declines. On this basis, more central banks are considering tightening monetary policy through withdrawing QE or actual rate increases. We favour emerging market local currency debt, where spreads look to provide adequate compensation for investment risk, even if growth in China is constrained. It is practical to own some duration in portfolios, whether through fixed income, real estate or certain equities, although the benefits from doing so are likely to be limited. Accordingly, we are neutral to underweight in most government and corporate bond markets.

Within commercial real estate, we have taken steps to neutralise our positions across all the major regions. Although global property remains an attractive asset class in a world of moderate growth, valuations mean that the bulk of the future return should come from rents. We maintain a small overweight position in European ex-UK REITs, as the region should benefit as the domestic economic growth environment improves. Generally, we prefer offices and logistics to the retail sector, which remains under structural pressure.

Among the major currencies, we hold a small overweight position in the Japanese yen, are neutral in the euro and the US dollar, and favour a small underweight position in sterling. This partly reflects cross-border capital flows, partly valuation measures, and partly to act as a diversifier. For example, the yen usually benefits when investor uncertainty falls and provides protection due to its characteristics as a longer duration asset.

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

House View process

The Global Investment Group remains focused on a pro-cyclical stance favouring risk assets. However, as valuations have become more extended and the economic cycle has matured, portfolios have sought diversification in specific asset classes.