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 April 2018 as well as the previous forecasts over the last year. Forecasts are updated each month with the latest macro-economic and risk factor changes.
What are our models 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 continued to decline on a trended basis against major trading partners.
- Short term interest rates continued to rise which is negative for fixed term assets.
- Economic growth is positive as indicated by year over year increases in commodity prices albeit at a slowing pace.
- Default spreads increased while term spreads tightened which may be indicative of investor concern.
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:
- Diversified commodities have the most favourable ranking over the coming 3-months followed by emerging market equities.
- Among fixed income asset classes, sovereign bonds have the most favourable ranking and corporate bonds the least favourable.
- Developed market REITs are the least favourable area to invest.
What are the key market movers and what can we expect from natural resource and real asset sectors over the coming three months?
- Despite recent market volatility, the three months ahead rankings of natural resources and real asset sectors have remained surprisingly stable.
- Energy commodities have the most favourable rankings followed by industrial metals.
- DM REITs have the least favourable rankings and listed infrastructure is the next least favourable.