Insight Investment

We outline how our asset allocation framework allows us to categorise the prevailing investment environment, and to view the outlook for asset price performance within a historical context.

Financial conditions:

• A key starting point to assess whether conditions are broadly stimulative or restrictive for growth
• It follows that growth dynamics (either periods of excessively strong or unusually weak activity) may have implications for both inflation and/or real interest rates. These interactions are important in understanding economic cycles and these dynamics provide useful insights from an asset-allocation perspective.
  
  

Growth regimes:

• Growth regimes have had a strong influence on historical returns, especially for equities and fixed income
• When we analyse historical data, the sweet spot for risk assets tends to be when growth is strong and getting stronger. During these times, the correct asset-allocation strategy has been to skew towards pro-cyclical exposures such as equities and away from government bonds which have historically been one of the worst performing assets 
  
  

Inflation and real rates regimes

• Broadly speaking, it is clear that assets generally perform positively when inflation is below central bank targets, regardless of whether inflation is rising or falling.
• The exception to this is the US dollar, which performs poorly in those regimes, but here real rates are key, as the dollar has historically performed far better during environments where real rates are rising than falling
• For fixed income and commodities, the level of inflation relative to central bank targets is as important as the direction of inflation
• Periods when inflation is above central bank targets and still rising are challenging for most asset classes
  
  

Bringing everything together

• Combining growth, inflation and real rates regimes allows us to easily compare prevailing conditions with history, and analyse how different asset classes performed over similar periods
• Once the prevailing regime is established, our framework provides important insights into how the regime is likely to evolve, allowing us to adapt our asset allocation appropriately
  
  

Looking beyond traditional asset classes increases the potential for diversification and returns

• In environments where both bond and equity markets may generate negative returns, we believe multi-asset strategies need all available tools to mitigate against downside risks.