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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 Management 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
The global economy has navigated a period of heightened geopolitical uncertainty more effectively than many investors feared. Despite intermittent market volatility, our central expectation remains that global growth will remain close to long-term potential over the next three years. Inflation has moved somewhat higher in the near term, but is expected to moderate gradually over the projection horizon and converge towards central bank targets.
Central banks have adopted a more cautious tone in recent months as inflation has proven somewhat more persistent than expected. Market expectations for further policy tightening have increased in some regions, although our High Conviction scenario assumes the major central banks will remain on hold in the near term, with the Bank of Japan being the exception, where further hikes are expected. Government bond yields have moved higher and are above our fair value assumptions in most regions, supporting improved medium-term return expectations. Credit spreads remain near historically tight levels, reflecting resilient corporate fundamentals and generally healthy balance sheets.
The outlook for corporate earnings remains constructive. Recent earnings delivery has been robust and analysts continue to forecast strong profit growth over the coming years. The key question for investors is whether these elevated growth expectations can be sustained. While equity markets have de-rated on a forward earnings basis and valuations appear more reasonable than headline measures may suggest, our valuation framework assumes that strong earnings growth will need to materialise to justify current market levels. As a result, medium-term valuation signals across most equity markets have become more balanced.
The United Kingdom (UK) outlook remains soft in the near term, reflecting subdued economic growth and tight financial conditions. While inflation is expected to moderate over the medium term, volatility in energy and food prices is likely to result in a more uneven path back towards target. The Bank of England is expected to remain cautious as it balances slowing growth against lingering inflation risks. UK government bond yields remain elevated and above our fair value assumptions. Concerns around the fiscal outlook and government finances continue to place upward pressure on longer-dated gilt yields. UK equities continue to screen reasonably attractively on valuation metrics, with consensus forecasts expecting healthy earnings growth over the coming years. Overall, medium-term expected returns for UK assets remain neutral.
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 (looking at the broader market) analysis, we integrate the bottom-up (company) 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.
Our latest asset class views are summarised below. The orange blocks represent the short-term views from the team, sometimes with an additional arrow if a Neutral view has more up or downside potential. Where the High Conviction scenario medium-term signals are different from the short-term views, it is indicated in blue. To determine the signal as Neutral or Above and Below, the model compares expected returns to what investors have historically required from these asset classes. For example, a Neutral Outlook implies a real expected return range of -0.5% to 1.5% for US Cash, 0.5% to 3.5% for US Bonds, and 3.5% to 8.5% for Global Equity. Views are expressed in the base currency of each asset class; currencies views are expressed separately.
