The Big Picture: Leaning into higher yields
Investment themes and asset class views
Many central banks are now tightening, and bond yields have risen. However, we believe the global economy remains in expansion mode, which encourages us to continue favouring cyclical assets, if not quite as much as before. Within our Model Asset Allocation*, we scale back the Overweighting to equities, while reducing the Underweighting to government and investment grade bonds (see Figure 20 for the details). While still favouring cyclical and riskier assets, we seek diversification in real estate and low duration assets such as the more liquid parts of the private credit universe.
Our themes
1. A resilient global economy favours cyclical assets
The global economy has so far withstood the rise in energy prices, helped by AI related investment spending. When energy prices eventually ease, we expect a mid-cycle upswing.
- Cyclical assets preferred
- Favoured equities: non-US, value and consumer, industrial, financial, material and technology sectors
- Commodity currencies supported
2. Opportunities are greater outside the US
US assets, especially equities, look expensive relative to history, while many international markets offer more attractive valuations and greater sensitivity to global economic expansion, in our view. US policy uncertainties and currency valuations suggest a weaker US dollar over time.
- US dollar weakness
- Commodities and emerging markets benefit
3. Seeking diversification in real estate and private credit
Though developed world long term yields have risen (and we now add to bond allocations), our main sources of diversification remain real estate and the more liquid parts of private credit.
- AAA-rated collateralised loan obligations (CLOs) as a cash alternative
- Bank loans among the preferred assets
- Direct real estate could offer mitigation against any threat of higher inflation
Asset class views
We evaluate a broad set of asset classes using a consistent framework built around multiple factors including the growth of the global economy, the direction of inflation and interest rates and the shape of the yield curve, market momentum, and valuations.
Note: There is no guarantee that these views will come to pass. *This is a theoretical portfolio and is for illustrative purposes only. It does not represent an actual portfolio and is not a recommendation of any investment or trading strategy. “CLOs” is AAA collateralised loan obligations. N/A indicates asset classes that are not included in the Model Asset Allocation structure. See Figure 11 for more detail and the appendices for definitions, methodology and disclaimers. Source: Invesco Strategy & Insights
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.
