The Big Picture: Investing in an uncertain world – Invesco’s Q1 2020 Update

LAGOS (Capital Markets in Africa) – Is this a buying opportunity or the half-way stage in a larger slump? The truth is we don’t know, so we have constructed a range of scenarios that see the S&P 500 anywhere between 1400 and 3000 in 12 months. A probability-weighted approach, adjusted for the recent change in cross-asset correlations, leads to a bar-bell approach in our Model Asset Allocation that favors gold and cash among defensive assets and real estate and commodities among cyclical. Investment-grade credit (IG) is favored under all scenarios. Regionally, we are now Overweight UK, Japanese and EM assets.

Model asset allocation
In our view:
– Equities offer good returns in optimistic scenarios but we prefer other cyclical. We go more Underweight.
– Real estate is among our favored cyclical assets. We stay at Maximum.
– Corporate high-yield (HY) is under threat in the worst outcomes. We reduce to zero.
– Corporate investment-grade (IG) is favored in all scenarios. We stay at Maximum.
– Government debt is unattractive and less diversifying. We remain Underweight.
– Emerging markets (EM) are still the sovereign space with the best potential. We stay at Maximum.
– Cash returns are low but stable and de-correlated. We remain Overweight.
– Gold has lost some of its froth and could still rise in the worst scenarios. We go Overweight.
– Commodities are now cheap (especially oil). We increase to Maximum.
– Currency hedges are not needed.

Assets that we consider good value on a long-term basis include:
▪ Oil (we always highlighted $20 per barrel as the target in a recession)
▪ Sterling (at 1.15, GBPUSD is close to historical lows)
▪ Real estate (the global REITS yield is now 5.5%).

Please read more of The Big Picture Investing in an uncertain world.