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.

July 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 and record high US-German bond spreads make neutral an appropriate position.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 political risk remains.Underweight
UK GiltsThe outlook for interest rates remains uncertain as the Bank of England is concerned with weaker economic data. Complications with Brexit can weigh on yields.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
Global 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 attractive due to emerging markets sensitivity to the pick-up in global growth and attractive spreads to global government bonds. However, country selection is crucial.Overweight
Corporate bonds
Investment GradeECB easing has driven European yields to unattractive levels and political risks remain heightened. US credit spreads are now tight and provide little protection should Treasury yields increase further.Underweight
High Yield DebtUS bonds no longer offer attractive returns relative to Treasuries on a risk-adjusted basis. European spreads fail to provide sufficient value. Neutral
Equities
US Equities Macroeconomic conditions and tax cuts, which will continue to boost company profits, support the market. Large domestic exposure lessens the impact of any trade tensions.Overweight
European Equities Broad-based economic expansion and stronger trade flows support corporate profits. Euro appreciation continues to restrain interest in European stocks and peripheral political risks remain but the market is inexpensive.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 market.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. The yen acts as a diversifier against the risk of a decline in global activity. Long-term factors support the euro but technical factors are a headwind.Overweight ¥, Underweight £, €, $
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
Cash
With global yields still extremely low, we still see better opportunities in risk assets.Underweight

Key Issues

The world economy looks set to grow quite robustly in 2018, but the differences between faster and slower growing countries are becoming more apparent. The most positive news comes from the US, where tax cuts, government spending and more confident businesses supporting employment and investment all suggest a strong recovery into the summer and solid growth into 2019. On the other hand, Europe and China are seeing slower growth, if still quite solid by past standards. The Chinese government has begun to tackle some of its debt burden, while political uncertainty in Italy is affecting EU business sentiment. Businesses in both countries are concerned about the possible fallout from the more protectionist noises that emanate from the White House - even if the sums involved are not yet large enough to impact sharply on activity.

Despite this backdrop, we still see a favourable outlook for corporate profits, as revenue growth and productivity gains offset rising costs. As long as inflation remains low, and hence central bank tightening remains moderate, then a pro-risk approach is indicated. The House View is overweight in global equity markets, with the exceptions of 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 a variety of signals: tariffs talk, political stress, and mixed reports about the pace of economic growth and inflation in the various economies. We are still wary about most bond markets; the Federal Reserve has indicated that it will tighten monetary policy steadily, and the ECB has announced that quantitative easing will end in 2018 and interest rates rise in 2019. Our portfolios are underweight in most government bonds, on valuation grounds, except some European peripheral markets. We prefer 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 inexorable rise of e-commerce.

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