Gain investment clarity in Asia Pacific through our research, specialized insights, and thought leadership.
Our long-term outlook utilizes a building block approach to estimate asset class returns, risk, and correlations to aid in allocation decisions.
We have witnessed a dramatic repricing of risk in the first few months of 2025. Following the “Liberation Day” tariffs, US equity markets have posted their 16th worst two-day period since 1928.
The once unstoppable US large cap equity market has underperformed its global counterparts since Trump’s election on November 4th, 2024, with a rotation into non-US equities and “risk-off” assets underway.
Being both defensive and flexible is key for investors during these moments as trade policies could be reversed just as quickly as they have been imposed. We have written extensively about the risks looming over US equity markets for quite some time, with elevated valuations and market concentration being key themes of our capital market assumption (CMA) publications.
Our CMA scoring aligns closely with our latest tactical positioning in a contraction regime, both at the portfolio risk level and when comparing equities to fixed income. Both time horizons recommend taking below-average levels of risk, sourcing that risk from fixed income over equities. This is intuitive, as the relative expected return of fixed income is elevated, and downside risks to the economy and markets are heightened.
To assist investors in identifying the relative attractiveness between our near-term tactical asset allocation (TAA) and our longer-term capital market assumptions (CMAs), we compare the two distinct time horizons for common asset class pairs.
Source: Invesco December 31, 2024. DM= developed markets. EM = emerging markets. For illustrative purposes only. Portfolios mentioned are hypothetical models. Benchmark is a global, moderate risk portfolio consisting of 60% global equities (MSCI ACWI) and 40% global bonds (BBG global agg).
Capital market assumptions (CMAs) form the foundation of our strategic and tactical asset allocation decisions. With an eye on 170 asset classes across private and public markets in 20 different currencies, we maintain a comprehensive view of trends, risks and correlations. Complete methodology information is listed here.3
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Investment risks
The value of investments and any income will fluctuate (this may partly be the result of exchange rate fluctuations) and investors may not get back the full amount invested.
Invesco Solutions develops CMAs that provide long-term estimates for the behavior of major asset classes globally. The team is dedicated to designing outcome-oriented, multi-asset portfolios that meet the specific goals of investors. The assumptions, which are based on 5- and 10-year investment time horizons, are intended to guide these strategic asset class allocations. For each selected asset class, we develop assumptions for estimated return, estimated standard deviation of return (volatility), and estimated correlation with other asset classes. This information is not intended as a recommendation to invest in a specific asset class or strategy, or as a promise of future performance. Estimated returns are subject to uncertainty and error, and can be conditional on economic scenarios. In the event a particular scenario comes to pass, actual returns could be significantly higher or lower than these estimates.
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As of Dec. 31, 2024, and subject to change.
Invesco Ltd. AUM of $1,844.8 billion USD as of March 31, 2025. AUM figure includes all assets under advisement, distributed and overseen by Invesco.
Capital Market Assumptions methodology
We employ a fundamentally based “building block” approach to estimating asset class returns. Estimates for income and capital gain components of returns for each asset class are informed by fundamental and historical data. Components are then combined to establish estimated returns. Here, we provide a summary of key elements of the methodology used to produce our long-term (10-year) estimates.
Fixed income returns are composed of:
Equity returns are composed of:
Currency adjustments are based on the theory of interest rate parity (IRP), which suggests a strong relationship between interest rates and the spot and forward exchange rates between two given currencies. Interest rate parity theory assumes that no arbitrage opportunities exist in foreign exchange markets. It is based on the notion that, over the long term, investors will be indifferent between varying rates of returns on deposits in different currencies because any excess return on deposits will be offset by changes in the relative value of currencies.
For volatility estimates for the different asset classes, we use rolling historical quarterly returns of various market benchmarks. Given that benchmarks have differing histories within and across asset classes, we normalize the volatility estimates of shorter-lived benchmarks to ensure that all series are measured over similar time periods.
Correlation estimates are calculated using trailing 20 years of monthly returns. Given that recent asset class correlations could have a more meaningful effect on future observations, we place greater weight on more recent observations by applying a 10-year half-life to the time series in our calculation.
Arithmetic versus geometric returns. Our building block methodology produces estimates of geometric (compound) asset class returns. However, standard mean-variance portfolio optimization requires return inputs to be provided in arithmetic rather than in geometric terms. This is because the arithmetic mean of a weighted sum (e.g., a portfolio) is the weighted sum of the arithmetic means (of portfolio constituents). This does not hold for geometric returns. Accordingly, we translate geometric estimates into arithmetic terms. We provide both arithmetic returns and geometric returns, given that the former informs the optimization process regarding expected outcomes, while the latter informs the investor about the rate at which asset classes might be expected to grow wealth over the long run.
CMA returns for fixed income have dropped over the quarter, with current yields falling below their expected future yields, creating a negative valuation change as yields shift upward as they mature. Global aggregate bonds are expected to return 4.5% over the next decade, around -0.6% less than last quarter and 1% less than we anticipated last year. Credit assets are still expected to outperform government bonds, with broadly syndicated loans and high yield both expected to return 5.7%, -0.7% less than last quarter.
Our CMA return for global equities is 5.4%, slightly higher than that of US equities, and dragged down due to the large overweight in the index towards overvalued US large cap equities. Quarter-over-quarter all major equity CMA’s have declined mostly due to higher valuations (-0.5% globally), outside of Japan, whose fundamentals (as measured by the price-to-book ratio) have returned to their long-term average. The change in the valuation component of China in particular stands out at -1.9%, with the price of the index rising considerably this past quarter on the hopes of a yet-to-be delivered stimulus package. When gauging relative opportunities outside of the US, emerging markets (EM) stand out due to a compelling expected earnings growth rate and a slightly positive tailwind from valuations. Within the US, small cap equities are more attractive than their larger counterparts as they have higher expected earnings growth rates and are near fair-value.
Global REITS, infrastructure, hedge funds, and commodities all are attractive relative to traditional assets as they are all expected to outperform US equities on a forward basis. Real assets are still recovering following the increase in interest rates relative to public equities and have a more attractive valuations. Further, they provide impressive dividend yields and are valuable diversifiers with low correlations to both equities and fixed income. From a risk adjusted perspective, all major alternative assets that we cover have expected return-to-risk ratios near double that of US equities, with global infrastructure (0.7) and hedge funds (0.8) standing out.
