Snapshot

Views at a glance - November


Equities stage a rapid recovery

After a dip earlier in the autumn, global shares are once again approaching record levels. Even the FTSE100, which remains below its pre-pandemic peak, has reached new highs for the year. The moves may reflect a degree of investor exuberance, but they are not entirely divorced from fundamentals: for companies in the MSCI AC World Index, profits for 2021 are set to be some 20% higher than in 2019. Third quarter earnings reports have so far generally confirmed the encouraging picture. While companies are reporting higher costs, higher volumes and prices have allowed them to protect margins. Whether this will remain the case is a key question for 2022. Investors have also been reassured by recent developments in bond markets and China. Yields on longer-term government debt have stabilised, after rising sharply in September and October. Meanwhile, the Chinese government has publicly called for property developers to continue making payments on their international bonds, allaying fears of a disruptive default.

The challenges of policy normalisation

American central bankers may be feeling pleased with themselves after watching the travails of their counterparts at the Bank of England earlier this month. The US Federal Reserve followed through on its well-signposted plan to scale back its bond-buying programme - and markets hardly blinked. Meanwhile, the BoE ruffled feathers by failing to deliver an interest rate rise that was widely expected, especially after a generous UK Budget. The BoE’s difficulties point to challenges that the Fed may yet face as it attempts to chart a path back to more conventional monetary policy settings. Managing market expectations amid a highly uncertain inflation environment could still be a source of more widespread volatility.

COP26: the implications for investors

The UK Budget has been criticized for failing to include policies or investments designed to support the energy transition, even though it was delivered just days before the COP26 summit. The omission is a reminder that implementing detailed emissions reduction measures is far more challenging – both politically and economically - than setting long-term, high-level targets. Even so, COP26 could result in agreements that force companies and governments to accelerate the transition to more sustainable economies, with potentially far-reaching implications for growth, inflation and profitability. Much will depend on the extent of international cooperation, especially between the US and China.

Portfolio positioning

We expect that the ongoing economic recovery and low interest rates will remain supportive of equity markets. We continue to see opportunities in longer-term themes, such as energy transition, technology and healthcare. We also have exposure to higher-quality companies in more cyclical sectors, as economies fully reopen and businesses increase capital expenditure. However, we may be heading towards a more volatile period for markets as growth momentum cools, inflation remains at somewhat elevated levels and central banks begin the process of normalising monetary policy. We therefore maintain our exposure to diversifying and defensive assets within multi-asset portfolios.

Outlook

At-A-Glance-EXPORTS-Icon-625x626.png Economics
  • Above trend global growth in 2021 and 2022
  • Growth supported by elevated consumer spending and increasing capex
  • Economic activity has peaked but remains at elevated levels
  • Moderating monetary and fiscal policy.
At-A-Glance-VALUATION-Icon-625x626.png Valuations
  • Bonds remain expensive but can provide some defensive ballast
  • Equities are expensive relative to their own history and need support from earnings growth
  • Alternative assets including absolute return funds look relatively attractive as diversifiers
At-A-Glance-SENTIMENT-Icon-625x626.png Sentiment
  • Investors remain concerned about persistently high inflation and threats to global growth
  • Sentiment indicators have moderated from extended levels
  • Volatility remains around long-term average levels
  • Investor cash levels have been trending down in recent months
At-A-Glance-RISKS-icon-625x626.png Risks
  • Risk of "stagflation" i.e. slower growth, higher inflation
  • Risk of further Covid variants and vaccine efficacy concerns
  • Impact of slowing growth in China and potential for further regulatory intervention
  • Elevated asset valuations

 

Asset Classes

Equities At-A-Glance-Status-Icons-POSITIVE-NEUTRAL-50x50.png Above trend growth and robust earnings have supported markets. Elevated concerns around inflation have led to monetary policy uncertainty, although fiscal policy initiatives have increased globally. We maintain conviction in long-term secular themes including technology and healthcare and energy transition.
Bonds At-A-Glance-Status-Icons-NEGATIVE-50x50.png Valuations remain expensive, although government bonds provide some portfolio insurance characteristics. We prefer US and Chinese government bonds due to relatively higher yields and diversification benefits. We prefer corporate and inflation-linked bonds to conventional government bonds.
Alternatives At-A-Glance-Status-Icons-POSITIVE-NEUTRAL-50x50.png Attractive diversification characteristics compared with equities and bonds. We favour absolute return strategies with the ability to deliver less correlated returns as well as real assets with long-dated visible revenue streams.
Cash At-A-Glance-Status-Icons-POSITIVE-NEUTRAL-50x50.png Cash has defensive qualities in potentially volatile markets.

Equities

Equities At-A-Glance-Status-Icons-POSITIVE-NEUTRAL-50x50.png Above trend growth and robust earnings have supported markets. Elevated concerns around inflation have led to monetary policy uncertainty, although fiscal policy initiatives have increased globally. We maintain conviction in long-term secular themes including technology and healthcare and energy transition.
UK At-A-Glance-Status-Icons-NEUTRAL-50x50.png Pressure on Bank of England to raise rates has increased, but the government have paved the way for increased spending on infrastructure as well as other areas. Valuations remain relatively attractive and we continue to see more opportunities within the domestic space.
Europe At-A-Glance-Status-Icons-NEUTRAL-50x50.png The growth outlook remains positive, however European earnings are relatively sensitive to a slowdown in China. Monetary policy continues to be accommodative while spending from the NextGeneration EU plan will be supportive.
North America At-A-Glance-Status-Icons-NEUTRAL-50x50.png The size of Biden’s stimulus plan is likely to be smaller than previously thought. Consumption from pent up demand is strong, although we are watchful of valuations which remain elevated.
Japan At-A-Glance-Status-Icons-NEUTRAL-50x50.png Swift progress in vaccine rollout programmes and a gradual relaxation of restrictions should support domestic companies as activity improves. Kishida retained overall majority, reducing political headwinds.
Asia/
Emerging markets
At-A-Glance-Status-Icons-NEUTRAL-50x50.png Normalising Chinese growth and weakening credit impulse may have broader implications for the region. Recent regulatory intervention from Chinese authorities, and the risk of contagion from the Evergrande Group crisis have weighed on sentiment in the near term. Cyclical rotation is supportive for the region as a whole.

Bonds

Bonds At-A-Glance-Status-Icons-NEGATIVE-50x50.png Valuations remain expensive, although government bonds provide some portfolio insurance characteristics. We prefer US and Chinese government bonds due to relatively higher yields and diversification benefits. We prefer corporate and inflation-linked bonds to conventional government bonds.
Government bonds At-A-Glance-Status-Icons-NEGATIVE-50x50.png Long-dated government bonds provide portfolio insurance characteristics, despite the risk of rising inflation. US Treasuries and Chinese government bonds offer relatively more attractive real yields.
Investment grade At-A-Glance-Status-Icons-NEUTRAL-50x50.png We are mindful of company leverage, spreads below pre-Covid levels and absolute yields at close to all time lows. Central bank action and fiscal policy remain supportive for the asset class. We see opportunities within asset-backed securities, which offer a relatively attractive yield.
High-yield At-A-Glance-Status-Icons-NEUTRAL-50x50.png Spreads remain at below pre-Covid levels. Default rates remain supported by central bank action, the low cost of debt and expected positive economic growth in the short term.
Inflation-linked At-A-Glance-Status-Icons-POSITIVE-NEUTRAL-50x50.png We prefer US TIPS to conventional treasuries and UK linkers given the reduced cost of currency hedging. Inflation expectations have the potential to move higher in response to supply chain concerns and energy prices.
Emerging markets At-A-Glance-Status-Icons-POSITIVE-NEUTRAL-50x50.png Emerging market bonds offer selective value across both US dollar and local currency debt. Idiosyncratic country risk remains diverse and a significant driver of returns.

Alternatives and cash

Alternatives At-A-Glance-Status-Icons-POSITIVE-NEUTRAL-50x50.png Attractive diversification characteristics compared with equities and bonds. We favour absolute return strategies with the ability to deliver less correlated returns as well as real assets with long dated visible revenue streams.
Absolute Return At-A-Glance-Status-Icons-POSITIVE-NEUTRAL-50x50.png Selected opportunities in market-neutral strategies given increased stock dispersion and diversification characteristics.
Liquid private real assets At-A-Glance-Status-Icons-POSITIVE-NEUTRAL-50x50.png Long dated revenue streams and income characteristics remain attractive in select parts of the market. Within this space we see good opportunities in digital infrastructure and exposure to private companies.
Gold At-A-Glance-Status-Icons-POSITIVE-NEUTRAL-50x50.png Gold is attractive as a diversifier given loose monetary policy, and should provide portfolio insurance in the event of a meaningful equity market correction, or inflationary shock.
Short equity vol At-A-Glance-Status-Icons-POSITIVE-NEUTRAL-50x50.png Offer attractive returns especially in times of heightened volatility, but we acknowledge the shorter-term correlation with equities.
Cash At-A-Glance-Status-Icons-POSITIVE-NEUTRAL-50x50.png Cash has defensive qualities in potentially volatile markets.

Key

At-A-Glance-Status-Icons-POSITIVE-50x50.png Positive
At-A-Glance-Status-Icons-POSITIVE-NEUTRAL-50x50.png Positive/neutral
At-A-Glance-Status-Icons-NEUTRAL-50x50.png Neutral
At-A-Glance-Status-Icons-NEGATIVE-NEUTRAL-50x50.png Negative/neutral
At-A-Glance-Status-Icons-NEGATIVE-50x50.png Negative
At-A-Glance-Status-Icons-UP-50x50.png Up from last month
At-A-Glance-Status-Icons-DOWN-50x50.png Down from last month

 

Terms

Spread: the difference in yield between a non-government and government fixed income security.

Duration: approximate percentage change in the price of a bond for a 1% change in yield.

This article is issued by Cazenove Capital which is part of the Schroders Group and a trading name of Schroder & Co. Limited, 1 London Wall Place, London EC2Y 5AU. Authorised by the Prudential Regulation Authority and regulated by the Financial Conduct Authority and the Prudential Regulation Authority. 

Nothing in this document should be deemed to constitute the provision of financial, investment or other professional advice in any way. Past performance is not a guide to future performance. The value of an investment and the income from it may go down as well as up and investors may not get back the amount originally invested.

This document may include forward-looking statements that are based upon our current opinions, expectations and projections. We undertake no obligation to update or revise any forward-looking statements. Actual results could differ materially from those anticipated in the forward-looking statements.

All data contained within this document is sourced from Cazenove Capital unless otherwise stated.