Standard Life Investments

Tactical Asset Allocation

We build our funds including bonds, equities, commercial property and other assets looking over a 12 month time horizon. Our decision-making sequence is first to consider the outlook for each asset class (e.g. Government bonds), followed by views within that market (e.g. the US versus Europe, or the European core economics against the peripheral countries. This table shows our more and less favoured markets around the world.

November 2018

Government BondsWe see most government bonds as expensive when inflation and interest rates are slowly rising in many countries, although some markets are attractive enough to overweight.Neutral
UK GiltsWhile the economy is slow growing, the Bank of England is still warning about future interest rate increases.Neutral
US TreasuriesMost, but not all, of the Federal Reserve’s expected interest rate increases have now been priced into the market. Overweight
European CoreWhile the economy is expanding steadily, the ECB has signalled it will halt its Quantitative Easing in 2018 and start to raise interest rates in 2019; it remains a good funding source.Underweight
European PeripheryThe spread between peripheral and core European government bonds is quite wide but we are cautious in view of political risks. Neutral
JapanJapanese government bond yields are very low compared with other markets, still held down by very strict yield curve control from the Bank of Japan despite the new flexible target.Underweight
AustraliaThe market is well supported by slower domestic economic growth and China’s deceleration; we see this as a useful defence against an adverse global growth scenario.Overweight
UK Index Linked NeutralReal (inflation adjusted) yields are the lowest (least attractive) amongst major developed economies. Inflation expectations have been fully priced into this market. Neutral
US TIPSThis market provides downside protection as and when investors look for a safe haven, as well as a degree of protection against any future inflation surprises.Overweight
CreditThe spread between corporate debt and government bond yields is too narrow in most markets to offer sufficient value.Underweight
UK Investment GradeSpreads are narrow and so credit is seen as vulnerable to economic shocks or upward surprises to gilt yields. Neutral
US Investment GradeSpreads are very tight and so provide little protection should Treasury yields increase due to inflation surprises or interest rate shocks.Underweight
Euro Investment GradeECB policy has driven European yields to unattractive levels, especially when political risks remain heightened.Underweight
US High YieldUS high yield bonds no longer offer attractive returns relative to Treasuries on a risk-adjusted basis.Neutral
Euro High YieldSpreads between European high yield and government debt fail to offer sufficient value.Neutral
Emerging Market (Hard Currency)Dollar denominated debt is at attractive spreads to Treasuries and all in yields despite challenges in some of the larger EM economies.Overweight
Emerging Market (Local Currency)A lot of bad news is now priced into local currency debt following sharp currency and spread corrections.Overweight
EquitiesHigh single digit profit growth globally provides fundamental support at a time of relatively depressed investor sentiment. Overweight
UKThe UK trades at cycle low valuations so we are now neutral. Brexit weakness would support the equity market via a lower pound. Neutral
USMarket supported by healthy macroeconomic conditions and tax cuts which will continue to boost company profits. The domestic exposure of many companies lessens impact of any trade tensions, tempered by valuations and positioning.Overweight
Europe ex. UKBroad economic expansion and relatively attractive valuations supportive for corporate profits. However, currency appreciation and peripheral political risks continues to restrain interest in stocks.Overweight
JapanAttractive as easy monetary policy and fiscal stimulus are helped by efforts to improve corporate governance, share buybacks and business investment, although yen strength periodically remains a concern.Overweight
Developed Asia ex. JapanVulnerable to policy tightening in China and worries about trade tensions, but a relatively inexpensive market keeps us neutral. Neutral
Emerging Market EquityAsset class has discounted much of the China trade risks. Valuations have improved and investor positioning is more attractive. Overweight
PropertyWe have a preference for Real Estate Investment Trusts rather than direct investment in commercial property globally. Overweight
UK The real estate cycle is at a mature stage and limited further capital growth is expected. Income remains attractive, although risks are elevated should the UK enter recession or political uncertainty surges.Neutral
USVacancies are low across most sectors and markets, although the sizeable retail sector is coming under more pressure from the rise in e-commerce. Neutral
EuropeSupported by stronger economic growth and low levels of new supply while valuations are helped by the cautious ECB policy stance. Overweight
CommoditiesWhile commodities are supported by the improvement in global growth, they are very sensitive to Chinese policy tightening; some commodities such as oil face an uncertain demand/ supply balance.Neutral
Cash and CurrencyWith global interest rates still extremely low we still see better opportunities in risk assets. Underweight
DollarStrong US growth, Fed tightening and weaker global growth from trade tensions mean an overweight dollar position is a diversifier against our equity and EM positions. Overweight
EuroPosition acts as a proxy hedge to EM exposure, and concerns over Italy and European politics in general. Underweight
YenTraditionally a safe haven currency, position helps the portfolio by acting as a diversifier if global activity declines.Overweight
SterlingBrexit represents a bimodal risk to Sterling with low conviction on the outcomes of a very uncertain process, while valuations also encourage a neutral stance. Neutral