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.

January 2019

Government BondsWe see most government bonds as generally unattractive and yield pick-up is not sufficient.Underweight
UK GiltsWhile the economy is slow growing, the Bank of England is still warning about future interest rate increases.Neutral
US TreasuriesAs US rates have backed up and more of the Federal Reserve (Fed) tightening is priced in, we have added gradually to Treasuries to protect against downside cyclical risks in other asset classes. Overweight
European CoreThe economy is expanding steadily but the European Central Bank (ECB) has signalled it will halt quantitative easing and start to raise interest rates in 2019. 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, held down by very strict yield curve control from the Bank of Japan. Underweight
AustraliaRecent Australian data shows signs of improvement but we still see this as a useful defence against an adverse global growth scenario.Overweight
UK Index LinkedReal (inflation-adjusted) yields are the lowest (least attractive) among 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
Corporate BondsThe spread between corporate debt and government bond yields has widened, offering some selective value. Overweight
UK Investment GradeSpreads have widened but we still see credit as vulnerable to economic shocks or upward surprises to gilt yields. Neutral
US Investment GradeSpreads are wider but still provide little protection should the US economy weaken materially.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 offer better value and an attractive carry, with higher credit quality than the US.Overweight
Emerging Market (Hard Currency)Dollar-denominated debt is at attractive spreads to Treasuries and all-in yields, despite challenges in some of the larger emerging market (EM) economies.Overweight
Emerging Market (Local Currency)A lot of bad news is now priced into emerging market local currency debt following sharp currency and spread corrections.Overweight
EquitiesGlobal profit growth in the high single digits provides fundamental support at a time of relatively depressed investor sentiment.Overweight
UKThe UK is trading at cycle-low valuations, so we are now neutral. Brexit related weakness would support the equity market via a lower pound.Neutral
USThe market is supported by healthy macroeconomic conditions and an earnings slowdown is largely priced in.Overweight
Europe ex. UKEconomic expansion has faltered recently, but valuations are supportive for corporate profits. Currency appreciation and peripheral political risks continue to restrain interest in stocks.Neutral
JapanThe market remains 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 periodic concern.Overweight
Developed Asia ex. JapanThe market is vulnerable to policy tightening in China and worries about trade tensions, but it is relatively inexpensive. Neutral
Emerging Market EquityThe asset class has discounted much of the China trade risks. Valuations have improved and investor positioning is more attractive.Overweight
PropertyWe prefer 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
EuropeStronger economic growth and low levels of new supply support the market. The cautious ECB policy stance helps valuations. Overweight
CommoditiesWhile improvement in global growth supports commodities, 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 see better opportunities in risk assets.Underweight
DollarWe expect US growth to slow and current positioning is extreme so we have downgraded our view.Underweight
EuroWe are underweight the euro, which acts as a proxy hedge on EM exposure and concerns over Italy and European politics in general. Underweight
YenAn overweight position in the yen, traditionally a safe-haven currency, acts as a portfolio diversifier if global activity continues to disappoint.Overweight
SterlingBrexit concerns have driven sterling lower. Short of a disorderly Brexit, sterling looks undervalued.Overweight