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Asset allocation
Rotating markets and politics
In Uncommon Truths, Invesco experts Paul Jackson and Andras Vig’s provide a regular in-depth look at the big topics impacting markets.
Markets are moving quickly and surprisingly, we now find ourselves attracted to government bonds, an asset class we’ve shunned for some time.
The backdrop to this publication is that inflation is peaking higher and later than expected. The Federal Reserve (Fed) and some other central banks are tightening aggressively1. Government bond yields have risen to levels not seen in more than a decade (in the US) and the global economic cycle feels more fragile by the day. Central bank aggression risks turning economic slowdown into recession.
Following the results of our optimisation process, we’re increasing government bonds to Overweight (for the first time since 2016) and reducing equities to Underweight within our Model Asset Allocation*. But we don't go as far as suggested by the optimiser, as we’re wary of having too few equities after the recent sell-off. We fear that bond yields, though more generous than for some time, can still go higher. Adding to the de-risking, we also eliminate the exposure to high yield credit.
To some extent, that dampening of portfolio risk is offset by an increase in the allocation to real estate (to Overweight) and reductions in the allocations to investment grade credit and cash. Both of these remain Overweight and we remain zero allocated to commodities, including gold.
From a regional perspective, we favour UK and emerging assets (EM). Indeed, our best-in-class selection of assets (based upon 12-month projected returns) is: UK government bonds, EM real estate, Chinese equities and USD cash.
Based on annualised local currency returns. Returns are projected but standard deviation of returns is based on 5-year historical data. Size of bubbles is in proportion to average pairwise correlation with other assets. Cash is an equally weighted mix of USD, EUR, GBP and JPY. Neutral portfolio weights show in Figure 3. As of 13 June 2022. There is no guarantee that these views will come to pass. See appendices for definitions, methodology and disclaimers. Source: BAML, MSCI, GSCI, FTSE, Refinitiv, Datastream and Invesco.
*This is a theoretical portfolio and is for illustrative purposes only. It represents the views of the authors and does not represent an actual portfolio. Nor is it a recommendation of any investment or trading strategy.
Rotating markets and politics
In Uncommon Truths, Invesco experts Paul Jackson and Andras Vig’s provide a regular in-depth look at the big topics impacting markets.
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In our quarterly analysis, Invesco experts track major trends and structural issues that investors may want to consider when making asset allocation decisions. Read our latest analysis that covers market strategy and opportunities across various asset classes.
Alternative opportunities Q2 2024
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.
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.
This is marketing material and not intended as a recommendation to buy or sell any particular asset class, security or strategy. Regulatory requirements that require impartiality of investment/investment strategy recommendations are therefore not applicable nor are any prohibitions to trade before publication.
Where individuals or the business have expressed opinions, they are based on current market conditions, they may differ from those of other investment professionals, they are subject to change without notice and are not to be construed as investment advice.