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Scenario modelling has formed part of Peregrine Wealth’s investment process for 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 macro-economic 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.
Our High Conviction scenario assumes global economic growth close to capacity over the next three years. Economic indicators continue to paint a mixed picture, with traditional recession indicators flashing red, but there are signs of a cyclical recovery in leading indicators. While the effect of the sharp rise in interest rates is being felt across Europe, the United States (US) is more insulated, with consumers and businesses having fixed debt at lower rates. With inflation easing closer to the target, central banks are expected to start cutting rates, which is assumed to support economic growth. Monetary policy is assumed to remain more restrictive than the previous cycle, with higher real interest rates.
Earnings have tracked sideways for the last two years, but renewed earnings growth is projected over the next three years. Market valuation in the US is stretched, but Europe and emerging markets (EM) are trading close to fair value. Global equity has a neutral rating, along with Europe and EM, while US equity has a below-neutral rating.
Cash is attractive under our moderate rate-cut assumptions. Government bonds and investment-grade credit are rated neutral, with yields and spreads close to our fair value assumptions. High yield bond spreads are below fair value and less attractive.
The United Kingdom (UK) economy has exited its recession and growth is expected to get back to capacity. The Bank of England signalled that rate cuts will start middle of this year, which should help consumers and businesses recover. UK government and investment grade corporate bonds are rated neutral, with yields and spreads around fair value. The UK equity market has performed well, and while valuations are still reasonably attractive, weak earnings growth is projected. The expected return outlook is now neutral.
The table below offers a summary of our Medium-Term Asset Class Valuation Signals based on our three-year High Conviction scenario. It is important to note that valuation-based signals are typically not good short-term market timing tools.
Outlook shown reflects the signals from Peregrine Wealth’s asset valuation models and is based on each asset class’s three year expected return. The model’s expected return is compared to what investors historically expected from these asset classes. As an example a Neutral Outlook will be roughly 0% real return for Cash, 2% for Bonds, 4% for Gold and 6% for Equity and Property. Note that no currency views are taken and currencies are assumed to change in line with inflation differentials for modelling purposes.