Parala's approach is straightforward and intuitive but one which requires highly complex and proprietary calculations to execute effectively. We've found that a simple way of expressing changes in expected investment outcomes is to use heatmaps. The heatmap below covers nine major asset classes. It shows a three-month ahead view of expected performance from June 2018 as well as the previous forecasts over the last year. The investor currency for expected returns is GBP and assumes that fixed income investments are currency hedged. Forecasts are updated each month with the latest macro-economic and risk factor changes.
What is our model telling us about key developments across asset classes for the coming months? A good place to start is considering some of the key macro trends that we have recently observed:
- USD currency rose on a 12-month basis against major trading partners.
- Short term interest rates rose, and default spreads spiked which is negative for fixed term assets.
- Economic growth was positive indicated by year over year increases in commodity prices.
- Volatility Risk Premium increased above its long-term average indicating heightened risk for equities.
So, what are the observable trends and what might we expect in terms of asset class relative returns over the next three months?
Here are some takeaways:
- EM equities have the most favourable outlook over the coming 3 months.
- Diversified commodities have dropped substantially in the forward-looking rankings.
- Among fixed income asset classes, EM bonds have the most favourable ranking and corporate bonds the least favourable.
- REITs remain an unfavourable area of investment over the coming three months.
What are the key market movers and what can we expect from equity markets over the coming three months?
- EM bonds have the most favourable ranking over the coming three months followed by Inflation Linked bonds.
- Among Corporate bonds, GBP Corporates have the least favourable forward-looking ranking and USD Corporates the most favourable.
- Within the UK, Sovereign bonds have a more favourable ranking than Corporates.
- Among geographies, EUR Corporate and Sovereign bonds are the least attractive.