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Scenario modelling has formed part of Peregrine Wealth’s investment philosophy for over two decades, and it 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 macroeconomic and market assumptions, including economic growth, inflation, interest rates, price-earnings 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.
High conviction scenario: Medium-term expected returns
Following the much-harsher-than-expected Trump trade tariffs, we have amended our High Conviction assumptions over the next 12 months but have left the two- and three-year assumptions unchanged. United States (US) growth, which was already slowing, is assumed to be below capacity. Europe is expected to take longer to recover, and Chinese growth has been marked lower. Inflation, which was assumed to be sticky and above target in many regions, was moved higher for the US. We assume inflation will moderate in the latter part of our three-year projection period in developed economies. Central banks, except the Bank of Japan, are still expected to cut rates further, despite sticky inflation. While lower rates should support economic and earnings growth, the impact will vary across regions and unfold with differing time lags.
Global markets experienced a sharp sell-off starting in February and experienced some of the most volatile days in history during April. Global earnings growth has been resilient, driven mostly by the US, but under our High Conviction scenario more moderate growth is expected over the next three years, within which we might see quarters with negative earnings growth. US valuations were close to historical highs at the start of the year and are now much improved post-sell-off. Emerging markets (EMs), Europe, and Japan are trading at more attractive valuations, but weaker earnings growth is projected for these regions. Over the medium-term, global equities – including US, Europe and EMs – are rated neutral.
Cash remains attractive over the next three years, despite the assumed interest rate cuts. Bonds have been volatile and are currently trading at yields near our fair value assumptions. Government bonds are rated neutral, along with credit, which saw spreads widen in the recent sell-off.
The United Kingdom (UK) economy continues to grapple with sluggish growth and persistent inflation. The Bank of England faces a challenging task, but it is expected to cut rates further over the coming year, which should support consumers and businesses. UK government bonds have been volatile, with current yields above our fair value estimates; however, they remain rated neutral. Credit spreads appear fair, and corporate bonds are also rated neutral. UK equities remain attractive from a valuation standpoint, though the earnings outlook is weak. Overall, medium-term expected returns carry a neutral outlook.
The chart below shows the three-year expected return versus the historical standard deviation of each asset class, based on our High Conviction scenario.
Near-term asset class views
Our investment process is anchored by a High Conviction macroeconomic scenario and the corresponding expected returns for asset classes. This foundation helps us form expectations about how markets should behave. However, we are keenly aware that short-term market behaviour frequently deviates from these expectations. We have long recognised that medium-term, valuation-based signals are often poor guidance for short-term asset performance.
To address this, we’ve developed a range of tools and indicators to enhance our short-term analysis. These include a close examination of market dynamics, cross-asset correlations, and currency and commodity trends, and several other technical factors. These insights help us adapt our views and make more informed short-term decisions.
The diagram below gives a visual representation of how these two parts of the process play into each other.
In addition to our top-down analysis, we integrate the bottom-up insights provided by our analysts. Their detailed research on individual companies and sectors plays a crucial role in shaping our overall views. When bottom-up analysis reveals fundamentals that diverge from market signals – positive or negative – we take this into account in refining our positioning. This dynamic approach allows us to balance macroeconomic factors with granular insights, ensuring our investment decisions reflect both the broader market environment and underlying characteristics of individual assets.
The following asset classes have a different short-term signal to the medium-term fundamental valuation or expected return signals:
- US credit has a neutral signal over the medium-term, but has moved to below neutral over the short-term as spreads can widen further in the current uncertain environment.
- Japanese equities have an above neutral medium-term signal, but the short-term signal is kept neutral in line with global equities with heightened volatility and correlation across markets.
- Gold is trading close to our model’s fair value and the model is giving a below neutral signal over the medium-term; over the short-term it is kept at neutral with various macro and geopolitical factors still in gold’s favour.
Our latest asset class views are summarised below.
