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Putting risky asset valuations into context

This Update compares the valuations of the twelve different “risky” asset classes that we cover on our Asset Allocation service, both relative to one another and to the yields of “safe” assets, as well as explaining how those valuations inform our long-term returns forecasts.
Oliver Allen Markets Economist
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Answers to your questions on global markets

We held a Drop In yesterday outlining our latest forecasts for global financial markets. This Update answers some questions that we received during that Drop In but didn’t have time to address. In view of the wider interest, we are also sending this Asset Allocation Update to clients of our Global Markets and FX Markets Services.

10 August 2022

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Credit spreads and excess returns

Although the spreads of many “risky” bonds have risen significantly this year, some aren’t currently at levels that have typically been followed by substantial future outperformance of their “safe” counterparts. Markets Drop-In (9th Aug): Chief Markets Economist John Higgins leads this 20-minute briefing on our latest quarterly Outlook reports from our Global Markets, Asset Allocation and FX Markets services. Register now.

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Asset Allocation Outlook

We think the worst is yet to come for most risky assets

Although we think that we have now passed this cycle’s peak in long-dated US Treasury yields, we still suspect that investors are underestimating just how far the Federal Reserve will raise interest rates, and how long it will be before inflationary pressures ease sufficiently for interest rate cuts to come onto the agenda. With that in mind, we think that the yields of most “safe” assets will end this year above their current levels. Meanwhile, given our relatively downbeat view of the global economy, we also expect most “risky” assets to see renewed declines, as risk premia climb and disappointing growth in corporate earnings undermines global equities. We think, though, that the outlook for most safe and risky assets is brighter in 2023 and 2024.

5 August 2022

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What to make of the US stock market’s relative valuation?

The high valuations of US equities relative to those elsewhere are, in our view, another reason to think they will lag their peers in the rest of the world over the coming years. What next for the ECB? We’re hosting a post-mortem after Thursday’s Governing Council meeting at 1100 ET to discuss its decision and our views on the euro-zone’s economic and inflation outlook. Register here.

8 September 2021

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EM assets & the risk of higher inflation

We think that there is a risk of a period of moderately higher inflation in some major emerging markets (EMs) over the coming years. If that came to pass, it would probably be bad news for local-currency sovereign bonds in these markets, but not necessarily for EM equities or sovereign dollar bonds.

3 September 2021

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Jackson Hole, tapering, and the risk of higher Treasury yields

We doubt that a hint at this week’s Jackson Hole symposium that the Fed may soon wind down its bond purchases would spark a sell-off in US Treasuries as dramatic as 2013’s “taper tantrum”. However, we still think that the risks are skewed towards yields rising over the next couple of years.

25 August 2021
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