Eastspring Investments continues to favour risk assets over the near-term given the benign economic backdrop, however it is more defensively positioned over the medium term as it expects things to deteriorate.
Eastspring said in its third-quarter outlook that it was overweight global equities on a three-month horizon as any economic weakness would allow the US Federal Reserve to cut rates, whereas it expected slowing growth and dwindling savings from the pandemic would weigh on valuations over a 12-month period.
Its top pick, unsurprisingly when it comes to equities, is US equities, where it is overweight on a three-month horizon given strong earnings and sales growth relative to other markets alongside continued exuberance over AI.
It is much more bearish on Europe, where it is underweight both on a three-month and 12-month horizon, given the moribund economic outlook, although it noted that valuations are cheap.
On emerging market equities, it is neutral on both a three-month and 12-month horizon, as it noted that emerging markets are expanding at a healthier rate than developed markets, which has the potential to filter through into earnings growth.
Unsurprisingly, it has a similar stance on Asia Pacific ex-Japan equities, noting also that valuations are more attractive than they are in the US.
Meanwhile, when it comes to fixed income, Eastspring’s strongest conviction is towards government bonds, particularly US Treasuries.
Eastspring noted that they had begun entering into long duration government bond positions in its multi-asset portfolios and it would look to scale into larger positions when there is more evidence of a slowing in the US economy.
In Europe, it is neutral on government bonds over a three-month horizon, noting that the European Central Bank’s recent cut was more of a moderation of a restrictive policy than a dovish pivot, but it is overweight on a 12-month horizon.
Turning to credit, Eastspring favours US high yield over a three-month horizon as all-in yields are attractive, although it is underweight the asset class on a 12-month horizon given the risk of the economy deteriorating.
On US investment grade, it is underweight on a three-month horizon given the tight spread levels, although it is neutral on a 12-month horizon.
It also favours Asian credit, being overweight on a three-month horizon, noting that steady global growth should help stabilise credit fundamentals.
