We have downgraded our view on commodities to neutral, but continue to like gold as a diversifier, says Patrick Brenner, Chief Investment Officer, Multi Asset, Schroders. Find out more in his latest multi-asset views below.
Over the month, US economic data confirmed our view that, for now, the US consumer is holding up and labour market conditions are benign. President Trump continues to generate headlines and, from an economic perspective, his pressure on Federal Reserve (Fed) Chair Jerome Powell continues to generate medium-term concerns about central bank independence and credibility. While this has not yet had a material impact on near-term outcomes, sustained political interference risks undermining central bank credibility over time. Combined with our above consensus view on US growth, this has led us to remain underweight US Treasuries.
Geopolitical risk is impossible to predict but we need to recognise that the international rules-based order that has been in place since 1945 is being challenged and gold remains a helpful diversifier in this regard.
With recession risk low and inflation under control, it is difficult to see a catalyst for an equity bear market. Valuations are challenging but we expect corporate earnings to drive returns this year. Last month we diversified our long-standing overweight position in global equities with an allocation to value stocks outside the US and we maintain this position.
Within bonds, we took profits on our long position in gilts against Bunds. Expectations of the Bank of England (BoE) turning dovish on favourable inflation data have largely played out. Bunds also underperformed on fiscal expansion concerns coupled with softer demand from Dutch pension reform changes. We have established a long position in Australian bonds funded out of Treasuries, as Australia offers better debt dynamics.
We maintain our negative view on the US dollar, especially given risks of a politically induced, dovish Fed, and this month we re-enter our long position in local currency emerging market debt as a means of benefiting from weaker US dollar trends and more disciplined fiscal policy. We remain long euro against the US dollar and have taken profits on our Brazilian real exposure.
In conclusion, we continue to believe that cyclical risks are contained but recognise that valuations are challenging and political risk is heightened. We are managing these risks by combining a long position in equities (with diversifying exposures to value) with gold and short positions in US Treasuries and the US dollar.
