Current global economic growth prospects remain subdued. However, according to Aberdeen Standard Investments (ASI), some of the political risks that plagued the economies and markets in 2018 seem to have eased, at least in the short term. This has been accompanied by the 'dovish' tone of the Fed, which has generated some relief for the markets and has been reflected in the asset prices’ moves.
Speaking to Funds Society, ASI claimed that its medium-term outlook for traditional asset classes (developed government bonds, corporate bonds and equities) remains intact: “We believe that they are facing a challenging return environment given current valuations.” Therefore, they feel “comfortable” with their relatively moderate exposure to equities and see attractive opportunities elsewhere.
Within traditional credit markets, however, they are somewhat concerned about the fact that the level of credit spreads on offer is not commensurate with the risk at this point in the cycle. They therefore have a negligible direct exposure to corporate credit and assure that they will “patiently” wait for a more attractive point to reinvest.
Likewise, they continue to see ABS as a good instrument for an “attractive risk-return trade off.”
The management company believes that local currency emerging market bonds are “the most attractive of the larger liquid asset classes” mainly due to the nominal and real yield they offer as compared to that of developed markets. This is supported by inexpensive currency valuations and “decent” underlying fundamentals.
Finally, they also see attractions across a broad range of niche alternative asset classes, such as litigation finances, healthcare royalties and aircraft leasing.
“Economics and politics are interconnected; they always have been and always will be,” claims ASI, before pointing out that, nevertheless, the nature of that connection “changes over time.” In that regard, the management company predicts that geopolitical uncertainty will continue to drive markets.
In particular, it sees a confrontation between Italy and the EU, a hard Brexit, and an escalation of the US-Iran conflict as increasingly likely.
The management company points out that future outlook analysis is a key part of its risk management approach, since it ensures that they look beyond simple quantitative measures of investment risk. In that regard, some scenarios that have been assessed include a trade war, the rapid increase in interest rates and a liquidity crisis.
According to ASI, their scenario analysis reinforces their focus on diversification through its multi-asset strategy - which includes products such as the Aberdeen Standard SICAV I - Diversified Income Fund - and, in addition, provides a useful basis for “challenging base case assumptions with respect to asset class correlations and individual market liquidity.”
The objective of this analysis is to consider how their funds could respond to different extreme scenarios, which include geopolitical (e.g. war in the Middle East), economic (e.g. China's hard landing), political (e.g. protectionist policies), market (e.g. major US treasury sell-off) and environmental (e.g. cyberterrorism).
“Although a scenario analysis is a highly subjective exercise and there are no right answers, we believe that by taking the time to think through these scenarios we have a better sense of how our portfolios may perform in a range of market conditions and some of the key sensitivities around this,” says ASI.