CAMERA: our capital market assumptions update

The following is an extract from our Q2 Asset Allocation outlook.

Last quarter we introduced CAMERA, our capital market assumptions framework. CAMERA combines two sources of return expectations – those from an equilibrium model that is primarily risk-based, and those from a model that is primarily valuation-based – to form a sensible blend of expected returns over a range of time horizons. The framework is based on the premise that in the long run, expected returns should converge to some equilibrium level, while over shorter horizons we may expect some deviation from equilibrium assumptions as a function of market valuations.

Over the past quarter, valuation-based return estimates for most broad equity markets as well as alternatives such as UK property and infrastructure have fallen modestly, leading to a slight steepening in the upward-sloping term structure of returns. Conversely, most bond markets have seen small increases in valuation-based return estimates, while equilibrium returns across all markets have remained relatively unchanged.

The above is an extract from our Q2 Asset Allocation outlook.