Investing within the business cycle
Equities are expected to outperform fixed income as growth moves above trend, the global earnings cycle recovers, and risky assets are supported by ample money supply growth. Gradual re-opening of face-to-face sectors favor cyclicals, value, and small-/mid-cap stocks, also supported by attractive valuations and rising bond yields. Improving risk appetite and a depreciating US dollar will drive outperformance in emerging markets (EM) equities over developed markets (DM). Currency and local market valuations should favor DM ex-US over US equities, with additional support from cyclical outperformance in 2021, and a rotation away from growth into value sectors and regions.
In fixed income, we believe credit markets have room for additional spread compression and may offer attractive risk-adjusted returns. Global yield curves may steepen with gradually rising bond yields but remain well-anchored by asset purchase programs and low inflation expectations. Real assets are expected to do well with low and stable inflation.
Investing in fixed income1
For our base and upside scenarios, we anticipate that continued economic expansion, positive fundamentals, and accommodative policies will continue to generate positive credit conditions over the next year, though returns may be limited by continued tight spreads.
In the downside double-dip economic scenario, tight valuations would contribute to negative outcomes, particularly for lower-quality credit and EM due to a related uptick in default losses.
Investing in equities2
Across scenarios, our sector allocations are a byproduct of our factor/style allocations.
In our base case scenario, we expect a rotation in favor of traditional cyclical sectors, which should benefit from a gradual re-opening of face-to-face sectors, attractive valuations, and rising bond yields.
In the upside scenario, the cyclical theme would be further boosted by additional infrastructure spending. In the downside scenario, a return to technology, health care, and communication services is likely to prevail.
Investing in commodities3
Precious metals should benefit from anticipated continued low real yields and the potential for inflation and dollar weakness. The tightening supply/demand balance for industrial metals should continue into 2021.
Energy markets still face substantial excess inventory, but suppliers have already reduced capex substantially. Agricultural markets should benefit from likely increases in Chinese demand and potential weather challenges.
Investing in alternatives4
In our base and upside scenarios, we are constructive on opportunistic strategies poised to take advantage of recent dislocations, including distressed credit and value-add real estate.
In our downside scenario, we favor credit strategies that are more senior in the capital structure, as well as hedge fund strategies with low correlations to the overall market.
Growth and venture categories are expected to continue to outperform across a range of macroeconomic scenarios.
Source: Invesco Fixed Income
Source: Invesco Investment Solutions
Source: Invesco Systemic & Factor Investing, ETF, and Indexing teams
Source: Invesco Investment Solutions. Alternatives tactical asset valuations represent our view of which asset classes are likely poised to outperform over an approximate three- to five-year time frame.