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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
Our High Conviction scenario assumes the global economy will grow close to capacity over the next three years. However, we expect that the United States’ (US’s) growth will soften over the next 12 months, before recovering. Fiscal packages in Europe and China should support activity in those regions. Inflation is currently near target in most areas, although core inflation remains sticky. US tariffs will put upward pressure on US inflation in the near-term. Labour markets are still tight, but signs of softening are emerging. Central banks in the US and United Kingdom are expected to cut rates further, albeit cautiously, but rates are expected to be on hold in Europe and Japan. While lower rates should support growth and earnings, the impact will vary across regions and unfold at different speeds.
Year-to-date, the US market has underperformed EU and Emerging Market (EM) markets on price (measured in US dollars) but continues to deliver stronger earnings growth. Under our High Conviction scenario, US earnings are expected to remain solid, while growth in other regions remains subdued. US valuations remain elevated, whereas EM and European markets are trading closer to long-term averages. Over the medium term, global equities – including Europe, and EMs – are rated neutral, while US equities moved to below neutral following the recent rally.
Cash remains attractive, despite projected rate cuts over the next three years. US bond yields are slightly above our fair value assumptions. Government bonds are rated neutral, as is investment grade credit, even though spreads remain tighter than our fair value estimates.
The United Kingdom (UK) continues to face headwinds from weak growth and elevated inflation. The Bank of England is navigating a complex environment but is expected to lower interest rates further over the coming year, which should lend some support to both households and corporates. UK government bond yields remain above our fair value estimates amid ongoing volatility, though we maintain a neutral stance. Credit spreads reflect current conditions reasonably well, and our view on corporate bonds remains neutral. UK equities offer compelling valuations, though the near-term earnings outlook remains uninspiring. As a result, we retain a neutral view on medium-term return prospects.
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 view
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.
Our latest asset class views are summarised below. The orange blocks represent the short-term views from the team, with an indication of risks leaning towards the up or downside. 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. No currency views are taken; currencies are assumed to move in line with short-term interest rate differentials for modelling purposes.
