Rotating markets and politics
Welcome to Uncommon Truths, Paul Jackson and Andras Vig’s regular in-depth look at the big topics impacting markets.
Based on year-to-date temperatures, it looks as though 2024 could be the hottest year on record. There may be some temporary factors (El Nino, for example) that explain this but the trend is towards warming. Global temperatures in each the last 13 months have been around 1.5 degrees Celsius above the 1850-1900 average for the month concerned.
Our models suggest there is a relationship between global temperature and the atmospheric concentration of CO2 in the previous 100 years, which itself is a function of CO2 emissions in earlier years. That gives hope that we can do something to limit the rise in temperature and the extent of broader climate change.
However, our model-predicted end-of-century temperatures are around 0.25 degrees higher than they were just three years ago, suggesting we are not making enough progress in reducing emissions (the chart shows how the atmospheric concentration of CO2 has evolved over more than 800,000 years and the trends we imagine to 2100).
Efforts to reduce CO2 emissions will rely on technological developments and we expect further large investments in such mitigation techniques (along with carbon removing initiatives, including reforestation). However, with our model suggesting a 3-4 degree Celsius rise in global temperature by 2100 (versus 1850-1900), we are also likely to witness large adaptation spending as we learn to live in a changing world.
Catch up on the last few editions:
FAQs
The optimal portfolios are theoretical and not real. We use optimisation processes to guide our allocations around “neutral” and within prescribed policy ranges based on our estimations of expected returns and using historical covariance information. This guides the allocation to global asset groups (equities, government bonds etc.), which is the most important level of decision. For Uncommon Truths, the optimal portfolios are constructed with a one-year horizon.
We’ve chosen to include equities, bonds (government, corporate investment grade and corporate high-yield), real estate investment trusts (REITs, to represent real estate), commodities and cash, on a global level. We use cross-asset correlations to decide which decisions are the most important.
Using a covariance matrix, based on monthly local currency total returns for the last five years, we run an optimisation process that maximises the Sharpe Ratio. Another version maximises Return subject to volatility not exceeding that of our Neutral Portfolio. The optimiser is based on the Markowitz model.
Related articles
Asset allocation
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.
Asset allocation
Quarterly Global Asset Allocation Portfolio Outlook | Q4 2024
Paul Jackson, Global Head of Asset Allocation Research for EMEA, shares his views on portfolio allocations in the quarter ahead.
Asset allocation
Applied philosophy – Strategist from East of the Elbe
Welcome to Applied philosophy, our view on global equity market model sector allocation.
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.
Important information
-
Views and opinions are based on current market conditions and are subject to change.
This is marketing material and not financial advice. It is 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.