I NVESTMENT OUTLOOK June 2016 Each month we take a look at the outlook for all the key global asset classes .This month, a ‘pre-Brexit vote’ with the assistance of Standard Life. KEY ISSUES The global economy weakened at the start of the year, caused by a variety of factors including headwinds to US manufacturing, excess capacity in China and political uncertainty in Europe. Nevertheless, activity in the services sector is holding up better than manufacturing. In coming months, political uncertainty could have a considerable impact on business and consumer confidence in several important countries. Financial markets endured a volatile start to 2016, with a sharp rally in oversold assets once fears over recession were disproved. We remain cautious on commodity prices or related assets, such as high yield debt or emerging market equities, given adverse supply/demand dynamics for many raw materials. Within equity markets, a focused approach is important given headwinds to corporate earnings growth in many markets. Turning to fixed income, we emphasise sustainable yield as a theme. We have further increased our positions in corporate bonds; although selective purchases are required given balance sheet risks. We also prefer to move up the capital structure when corporate earnings growth is low. Within government bonds, we prefer European to US bonds, bearing in mind the relative direction of inflation and monetary policy pressures. Within real estate, we prefer continental Europe versus the UK, as it is at an earlier stage of the cycle and low interest rates continue to support core markets. We remain Neutral in North American and Asia Pacific real estate markets. LONGER TERM OUTLOOK EQUITIES UK • Political uncertainty offsets domestic economic strength to some extent. A large portion of the market is exposed to weaker commodity prices, emerging market pressures and greater banking regulation. • NEUTRAL US • Weaker revenues in key sectors such as energy pose a concern, so earnings management is key. Dividends and share buybacks remain supportive, while valuations have become more attractive. • NEUTRAL EUROPEAN • Corporate earnings should receive a lift from an improvement in domestic demand, good cost control and cheaper commodities. However, a variety of political issues overhangs markets. • NEUTRAL (x VERY HEAVY) JAPAN • Yen appreciation affects Japanese equities but improving corporate governance, lower corporate taxes and the QQE programme supports the asset class. Decisions on fiscal policy and structural reforms over the summer are key. • NEUTRAL DEVELOPED ASIA • Trade flows are increasingly a headwind, with a strong Australian dollar affecting its terms of trade. China’s economic slowdown is harming commodity producers as well as regional trade. • LIGHT EMERGING MARKETS • There are pockets of deterioration within emerging markets, with the commodity price slump badly affecting Brazil, political uncertainty in Eastern Europe and large behavioural shifts affecting the Chinese market. • NEUTRAL GOVERNMENT BONDS UK GILTS • The positive economic growth backdrop supports eventual rate increases. The Bank of England will examine how the US tightening cycle progresses and monitor inflation pressures. • LIGHT EUROPEAN • An environment of low inflation, modest economic growth, further QE and negative official rates support European bonds. Political pressures may affect peripheral bond markets on occasion. • HEAVY US TREASURIES • Tightening labour markets and rising wages can give the Federal Reserve reason to raise interest rates gradually. However, it is wary of market stress and global economic conditions. • VERY LIGHT JAPANESE • The Bank of Japan’s sizeable bond-buying programme and negative interest rates have driven valuations into expensive territory, as authorities try to reflate the economy. • NEUTRAL GLOBAL INFLATION LINKED DEBT • While inflationary conditions are subdued globally, markets may react to a rise in headline inflation as the impact of previous commodity price weakness becomes less marked over time. • NEUTRAL GLOBAL EMERGING MARKET DEBT • Dollar-denominated bonds are Heavy as spreads show better value, while local currency bonds are Neutral as careful examination is required of individual currency and spread factors. • HEAVY / NEUTRAL CORPORATE BONDS INVESTMENT GRADE DEBT • Our preference is to be higher up the corporate capital structure. Widening US credit spreads create an attractive opportunity over low-yielding Treasuries; while the ECB’s bond-buying programme supports euro debt. • HEAVY HIGH YIELD DEBT • Recent sell-offs have improved valuations modestly, but overcrowding remains a risk in the US market when monetary policy is tightened; European debt remains supported by yield-seeking investors. • NEUTRAL PROPERTY UK • The economic growth environment supports real estate and yields remain attractive. However, the market is more advanced in the cycle than continental Europe. • NEUTRAL EUROPEAN • Core markets continue to offer attractive relative value in light of the low interest rate environment supported by QE, while recovery plays are showing consistent capital value growth. • HEAVY NORTH AMERICA • Canadian property faces headwinds from significant office construction and consumers that are sensitive to interest rates. The US should benefit from continued economic growth but pricing is quite aggressive. • NEUTRAL ASIA PACIFIC • An attractive yield margin remains but markets are divergent. Returns are driven by rental and capital value growth in Japan, but limited to capital growth in Australia, Hong Kong and China. Emerging Asia markets are risky. • NEUTRAL OTHER ASSETS FOREIGN EXCHANGE • The US dollar has risen considerably but benefits from safe-haven status; European and Japanese central banks aim to keep their currencies weak. The EU referendum is negative for sterling. o US DOLLAR HEAVY o STERLING LIGHT (x NEUTRAL) o EURO NEUTRAL o YEN NEUTRAL (x LIGHT) GLOBAL COMMODITIES • Different drivers, such as US dollar appreciation, Chinese demand, Middle East tensions and climatic conditions, influence the outlook for different commodities. • NEUTRAL CASH • The US and some emerging markets have started to raise interest rates, while the UK waits for the opportune moment. In Europe and Japan, policy should remain easy. • NEUTRAL ______________________________________________ Note: the value of an investment and the income from it can go down as well as up, so you may get less than you invested and tax rules and allowances can change. The ideas and conclusions in this column are those of Standard Life and do not necessarily reflect the views of The Financial Group. They are for general interest only and should not be taken as investment advice or as an invitation to purchase or sell any specific security.