Scenario modelling enables us to better understand potential market outcomes and construct stronger portfolios. The Peregrine Wealth investment team has a core, or “High Conviction”, scenario based on a three-year view, which is expressed as macro-economic and market assumptions, including economic growth, inflation, interest rates, price-earnings (PE) multiples, and credit spreads, to list a few. Based on these assumptions, our asset valuation models produce expected returns for various asset classes. This section is used to summarise our High Conviction view and the resulting asset signals.

Major central banks have indicated that they will do what it takes to bring inflation back under control and are rapidly hiking interest rates into restrictive territory. Global economic growth has already started slowing to below capacity, but the extent of the downturn remains highly uncertain. With seemingly structural higher inflation present, and year-on-year inflation rates still far above targets, it is unlikely central banks will “pivot” (which means turning from tightening back to easing monetary conditions) easily. Inflation is arguably one of the most lagging economic indicators, and with central banks indicating they will be “data dependent”, there is a high probability that they will make a policy mistake and overtighten. We continue to highlight the need to consider a range of potential economic outcomes, with multiple scenarios feeding into our asset allocation process.

Our “High Conviction” scenario assumes that global, including United Kingdom (UK), economic growth will be below capacity for the next two years, before recovering. Inflation is assumed to lower towards target as base effects, higher interest rates and slower economic growth take effect. Interest rates are assumed to continue rising in the near-term across most developed markets but will then come down again within our three-year horizon. Bonds have sold off sharply and yields are above our fair value assumption. Below capacity economic growth translates into low company earnings growth over the next three years and our company earnings projections are more conservative than current consensus numbers, which have remained strong. After a sharp selloff year-to-date, equity valuations (trailing price-earnings ratios) are more attractive and below our fair value assumptions in all regions.

The investment horizon is crucial. Reduced liquidity and increased recession risk are likely to continue, causing weakness and volatility across markets in the near-term. On a three-year outlook, and with conservative assumptions, expected returns on global and UK equity are rated neutral. Signals vary amongst regions, with emerging market equities providing a stronger signal than developed markets. UK pound and US dollar fixed income assets are more attractive after sharp selloffs. See the table below for a summary of our Asset Class Valuation Signals.