As we highlighted in the previous quarterly edition of Invesco’s Long-term capital market assumptions (CMAs), concentration in US large-capitalization equities is a risk even for moderate, globally diversified investors. We believe diversification could potentially mitigate some of this risk. However, some of the challenges that stem from overvalued concentrated equity markets are pervasive beyond the US.
Our CMA valuation building block model considers two critical variables when determining a fair valuation for equities: Inflation expectations, and interest rates, which we then compare to current valuations to determine whether they are likely to expand or contract over our forecast period. Both variables have an inverse relationship with valuations, making elevated valuations more difficult to justify in a macroenvironment with higher interest rates and inflation.
Higher valuations are likely to be challenging for equities over the long term. Relative to fixed income, equities are significantly less attractive than they were just a couple of years ago. Not all is lost for equity investors as there are areas of opportunity highlighted by our CMAs, such as in US small caps and emerging markets.
Invesco Solutions develops capital market assumptions (CMAs) that provide long-term estimates for the behaviour of major asset classes globally.
The assumptions, which are based on a 10-year investment time horizon, are intended to guide strategic asset allocations. For each selected asset class, we develop assumptions for expected return, standard deviation of return (volatility) and correlation with other asset classes.
Paul Jackson, Global Head of Asset Allocation Research for EMEA, shares his views on portfolio allocations in the quarter ahead.
In each new edition, we look at the outlook for private market assets. In particular, we focus on private credit, private equity, real estate, infrastructure and commodities.
We share our scenario analysis to help clients navigate an uncertain landscape. Our base case is that inflation has peaked – in which case we favour high yield credit and emerging market assets. Should inflation prove more persistent, with a deeper recession on the cards, then cash and government bonds are the order of the day. Read on for details – and for why we favour investment grade credit in both scenarios.
