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.

May 2018

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

Government bonds
US TreasuriesBonds have priced in most, but not all, the expected interest rate increases. However, stretched short positioning makes neutral an appropriate position.Moved to 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. Peripheral bonds offer value against bunds.Neutral
UK GiltsThe interest rates outlook 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 to any risk-off moves as well as a degree of protection against any future inflation increases. Overweight
Global Emerging Market Debt Local currency yields are attractive due to emerging markets sensitivity to the pickup in global growth, improvements to the balance of payments, and attractive spreads to global government bonds. Overweight
Corporate bonds
Investment GradeQE supports UK bonds, but 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
Equities
US Equities The market is supported by improving company profits and tax cuts, with attractive opportunities being seen amongst sectors such as technology and financials.Overweight
European Equities Corporate earnings are improving on the back of a widespread pickup in economic growth across the region plus 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, but yen strength periodically remains a concern.Overweight
UK Equities UK economic growth expectations are weakening and Brexit remains a longer-term threat. The FTSE 100 is dominated by companies with relatively modest growth prospects. 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 The asset class is supported by global growth improvements, especially for key sectors such as Asian technology. A tightening bias in China may prove to be a headwind for the asset class.Overweight
Real estate
UK The UK real estate cycle is at a mature stage and there is limited further expected capital growth. Income remains attractive, although risks are elevated should conditions turn recessionary or political uncertainty grows.Neutral
EuropeEuropean property is supported by stronger economic growth and low levels of new supply while valuations are supported by the ECB policy stance. 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 an active Yen position which can act as a diversifier against the risk of a decline in global activity.Overweight ¥, Neutral $, €, Underweight £
Global Commodities While commodities are supported by the improvement in global growth, they are very sensitive to Chinese policy tightening, and some commodities such as oil face an uncertain demand/ supply balance.Neutral
Cash
With global yields still extremely low, we still see better opportunities in risk assets.Underweight

Key Issues

After some deceleration in global activity into the spring, prospects for the world economy look rather good for the rest of this year and into 2019. Business surveys have eased back in recent weeks, but are still at solid levels on a historical basis. Positive drivers include lower unemployment in many countries, supporting consumer spending, while healthier banking systems and more upbeat business confidence are encouraging companies to invest. In addition, US tax cuts and spending increases will materially boost US economic growth. Although central banks are raising interest rates (in the US) or withdrawing some monetary support (in Europe) they are doing so gradually. There are potential problems ahead, however, noticeably whether low-level trade conflicts between the US and China turn into something more serious. US-Iranian tensions could also spill over into the oil price.

Against this backdrop, the outlook for corporate profits is favourable. As long as central bank tightening remains moderate, then a pro-risk approach is indicated. The House View is overweight in most equity markets. Exceptions involve developed Asia, given concerns about the potential extent of China’s slowdown, and the UK, where political uncertainty is undermining business profitability.

Fixed income markets are responding to mixed signals about the pace of economic growth but also some signs of higher inflation in the US, even if it looks contained in other major economies. Looking ahead, the Federal Reserve has indicated that it will tighten monetary policy steadily. Some investors are also considering the ECB ending quantitative easing (in 2018) and even raising interest rates (in 2019). Our portfolios are underweight in most government bond markets, except some European peripheral markets. Even with expected rate increases, we prefer some high-yielding bond markets and inflation-linked bonds as a precaution against any inflation surge.

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 future returns 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 from the rise of e-commerce.

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.