Invesco Investment Solutions (IIS) is dedicated to designing outcome-oriented, multi-asset portfolios that meet the specific goals of investors. Capital market assumptions (CMAs) are key to this effort.
The team develops CMAs that provide long-term estimates for the behavior of 160 major asset classes in 19 different currencies, including 7 private asset classes. Due to the pandemic, this quarter’s special edition includes manual adjustments to our CMAs based on prior recessions, resulting in three distinct investment scenarios; Bull, Base, and Bear.
Here we summarize our CMAs for Q3 2020. For the full report, download it here.
Asset allocation insights: Strategic perspective
By Duy Ngyuen (CIO, IIS) and Jacob Borbidge (Senior Portfolio Manager, Head of Investment Research, IIS)
It is difficult to imagine that only three months ago we were writing about riding out the first global recession, record levels of unemployment and declines in earnings not seen during any of our lifetimes. While it may have felt like the last quarter lasted much longer than a quarter, with us all stuck at home with limited distractions, it is still remarkable
to take stock of what has changed during that short time period. Record unemployment and potential demand destruction has been whitewashed over by an avalanche of fiscal stimulus. Concerns over markets locking up due to liquidity demands have largely been alleviated through loosening monetary policy and direct intervention in markets that needed it most. Lastly, let’s not forget the support to main street via financing and other aid to businesses, troubled or not, helping them to weather the storm and be ready to reopen when conditions allowed. Taken in isolation, someone looking at those factors could easily see how markets could have recovered the way they have this quarter, but it was certainly not evident to most at the time. Add to that the level of technological innovation many of us have witnessed during this time period, with working from home and near-instant delivery of goods now options for many individuals, and some of today’s lofty asset prices start to make sense; historic loss followed by historic rebound, supported by quick policy action and further hopes of innovation on the medical front.
The confounding detail that is at odds with this recovery, of course, is COVID-19 and its continuing impact on the world. At this time, we are still seeing the virus rapidly spread in many regions along with resurgence and reclosure in areas where there was thought to be containment. For the most part, the COVID charts we’ve been following are all still pointing up. In alphabetical terms, we would classify the recovery in the market and economy as squarely in the “V” territory, while the virus is still looking like a “U” (inverted) or maybe a cursive “W” if we want to get creative.
Amid this uncertainty we are privileged to share our 3Q 2020 Capital Markets Assumptions with our clients and colleagues. From the Solutions Team’s strategic perspective on asset allocation, we remain in our Base case scenario introduced last quarter and we feel the market has largely priced in a picture-perfect COVID and economic recovery, with the worst largely behind us. In the short-term, given the level of stimulus from around the globe, this may be broadly within reach. Even if that proves to be the case, the multi-trillion-dollar bill for this stimulus will eventually come due, and we expect there will be winners and losers along the way, precisely the reason for our long-term look on a broad set of assets globally.