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.

August 2017

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

Government bonds
US TreasuriesTighter labour markets and rising wages give the Federal Reserve the rationale to continue adjusting monetary policy, with upward pressures on core inflation a key signal for more aggressive action.LIGHT
European Bonds Bonds are not well supported, as the improvement in activity across more economies allows the ECB to plan policy tightening. However, markets are overpricing future inflationary pressures.LIGHT
UK GiltsThe outlook for interest rates remains mixed while the economy faces both higher inflation and downward pressures on economic activity. Yields are constrained by regulatory driven flows. However, the asset class is expensive on long-term valuation metrics.NEUTRAL
Japanese BondsThe central bank is still attempting to reflate the economy with its QE and yield curve control policy alongside negative short-term rates. The absence of yield makes this asset class relatively unattractive.LIGHT
Global Inflation-Linked DebtInflation is generally well contained globally with breakevens largely reflecting this. There is more potential downside for UK and European inflation markets but the US could re-price higher.NEUTRAL
Global Emerging Market Debt Local currency yields are more attractive due to emerging markets sensitivity to the pick-up in global growth. US dollar-denominated debt is supported by attractive spreads over Treasury debt.HEAVY
Corporate bonds
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.LIGHT
High Yield DebtThe hunt for yield has driven investors to this asset class, although overcrowding remains a risk in some sectors, especially in the US when monetary policy is being tightened or oil prices are under pressure. NEUTRAL
US Equities While stock market valuations are fairly full, equities can rally further on the back of improved global economic conditions feeding into strong profits growth, with the potential for fiscal easing and more deregulation.HEAVY
European Equities Corporate earnings are improving following a widespread pick-up in economic growth across the region and stronger international trade flows. Investor sentiment is positive with sizeable inflows from overseas buyers.Moved to VERY HEAVY
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.NEUTRAL
UK Equities UK economic growth expectations are weakening and Brexit remains a longer-term threat. 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 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 Emerging market assets are attractive as global economic growth improves, especially for key sectors such as Asian technology. A tightening bias in China is a headwind for the asset class.NEUTRAL
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. However, valuations are not as compelling against the backdrop of a less supportive stance by the ECB.Moved to NEUTRAL
North AmericaThe US market has low vacancies across most sectors and markets, although the sizeable retail sector is coming under more pressure. Elsewhere, new construction is mostly in check, providing a window for rent growth.Moved to 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 vacancy, healthy tenant demand and resilient economies.NEUTRAL
Other assets
Foreign Exchange The major currencies are within broad valuation ranges. We prefer the yen in portfolios as a diversifier against the risk of a noticeable decline in global activity or a serious political shock.Heavy ¥, Neutral $, €, £
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 a difficult demand/supply balance.NEUTRAL
LIGHTWith global yields still extremely low, we still see better opportunities in risk assets.

Key issues

In coming months, we expect global equity markets to benefit from solid corporate cashflows across a range of sectors. Global economic activity is broadening out across Europe, North America and Asia, as shown by the improvement in trade flows. There is the potential for an additional boost if the Trump administration can push ahead with tax cuts, although political obstacles are clear. Valuations are becoming more of a headwind to future market movements, while corporate profits growth should decelerate moderately in coming months as late-cycle cost pressures start to appear. Our favoured equity markets are the US and Europe, and to a lesser extent various emerging markets, while we are neutral elsewhere.

Turning to fixed income, valuations again remain an important consideration, especially when more central banks are considering tightening monetary policy through withdrawing QE or actual rate increases. The only market we favour is emerging market 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 moved to a neutral position 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 is expected to come from rents.

Among the major currencies, we have a small overweight position in the Japanese yen and the euro, and small underweight positions in the US dollar and 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.

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 retains a cautious medium-term outlook, as a variety of political, financial and economic drivers point to higher levels of financial market volatility. While there are particular areas of value, investors should be highly selective in asset allocation decisions.