I recently presented a webinar detailing the three scenarios that the Invesco Investment Solutions team believes could unfold over the coming 12 to 15 months. We created three brief videos that outline our Base, Bear and Bull case scenarios that I discussed. The webinar included a Q&A session, but we were not able to get to all of the questions within our allotted time. I would like to answer some of them here.
Q: Do you see a rise in inflation within the next five years and would you recommend adding some real assets to a portfolio?
A: I believe inflation will likely remain low for a long time, and we actually have to worry more about a disinflationary or even deflationary environment† given the very high level of spare capacity in labour and production markets. Furthermore, the substantial debt overhang we may accumulate globally should lead to a meaningful increase in private sector savings, adding additional disinflationary pressures, similarly to what was experienced in Japan and Europe over the past few decades. Therefore, from a strategic asset allocation perspective we are not seeing an economic rationale for an overweight to real assets, but a diversification benefit is still likely to remain.
Q: Can you please expand on the equity portion within your portfolios? What type of equities? Are there geographic or sector tilts?
A: In terms of regional allocations, we are overweight emerging market equities versus developed markets. In terms of factor exposures, we are overweight size (i.e., small- and mid-caps) and value. Our sector exposures are a by-product of our factor exposures, which today translates into an overweight to financials, industrials and materials, while being underweight communication services, healthcare and technology.
Q: What are your thoughts on gold and are you including bullion in your portfolios?
A: We typically don’t invest in gold, as we believe it doesn’t carry a positive risk premium over time and its behaviour in terms of volatility and correlation to other asset classes is very unstable. While this may result in clear diversification benefits to a portfolio, we typically seek that diversification benefit via other strategies that have a risk premium attached to them. With that said, I believe gold should benefit from a U.S. dollar depreciation cycle, which we believe is likely to be the prevailing regime in foreign exchange over the next decade.
The Invesco Investment Solutions team employs the science of investment factors to blend active and passive strategies to suit various investment goals. You can learn more about how we do this here. https://www.invesco.ca/managedportfolios