In our base case scenario, we think it likely that 2023 will be a year of transition from a contraction regime to one of recovery.
Our base case assumes a rapid decline in headline inflation to below core inflation (assumed to remain above target over the coming years)
As such, we’ve reduced the defensiveness of our Model Asset Allocation, while keeping some powder dry for when recovery is confirmed.
It’s our view that 2023 will be a year of transition from a contraction regime to one of recovery.
We explore the implications of this shift in our base case scenario, which assumes a rapid decline in headline inflation to below core inflation (assumed to remain above target over the coming years). We expect sufficient disinflation in early 2023 to allow central banks to first scale back and then end rate hikes. This is likely to be in the second quarter of 2023 for the US Federal Reserve and in the second half of the year for the European Central Bank and Bank of England.
| Base case | Alternative | |
|---|---|---|
| Inflation trend | Disinflation | Persistent inflation |
| Central bank policy | Rates peak in mid-2023 | Rates rise throughout 2023 |
| Yield curves | Further inversion with pivot (short rates up,long rates down) | Further inversion (yields rise along the curve but more at short-end) |
| Global growth | Global growth Moderate risk of shallow recession | Elevated risk of deep recession |
| Market regime | Contraction -> recovery before end 2023 Q1 | Contraction regime persists |
| Favoured currencies | USD -> CAD EUR AUD GBP EM |
USD EUR GBP |
| Favoured assets | Cash -> HY credit Government bonds Real estate IG credit Equities Industrial metals Gold |
Cash Government bonds IG credit |
Source: Invesco. Data as at November 2022
As such, we’ve reduced the defensiveness of our Model Asset Allocation, while keeping some powder dry for when recovery is confirmed. We’re reducing the government bond allocation to Neutral, while increasing the allocation to high yield (to Overweight).
We’ve also reduced the cash allocation to zero, replacing it as diversifier of choice with an Overweight allocation to gold. From a regional perspective emerging markets (EM) and US are preferred.
Quarterly Global Asset Allocation Portfolio Outlook | Q3 2024
Paul Jackson, Global Head of Asset Allocation Research, EMEA, provides insights into various economic factors that could be key in the third quarter of 2024.
Tactical asset allocation
Welcome to our Tactical Asset Allocation hub. Here you’ll find a selection of the most recent research from Invesco Solutions. Read our latest analysis that covers market strategy and opportunities across various asset classes.
Capital market assumptions | Q2 update
Invesco Solutions develops capital market assumptions (CMAs) that provide long-term estimates for the behaviour of major asset classes globally.
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.
Data as at November 2022. This marketing communication is for discussion purposes only and is exclusively for use by professional investors in Continental Europe as defined below, Qualified Clients/Sophisticated Investors in Israel and Professional Clients in Dubai, Ireland, Isle of Man, Jersey, Guernsey and the UK. It is not intended for and should not be distributed to, or relied upon, by the public.
This document is marketing material and is not intended as a recommendation to invest in 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. The information provided is for illustrative purposes only, it should not be relied upon as recommendations to buy or sell securities.
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