CAMERA: Our capital market assumptions update

The below is an extract from our Q3 Asset Allocation outlook.

Earlier this year 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.

With the UK general election now behind us, and with the Bank of England taking a ‘finely balanced’ decision not to cut in June, it is perhaps interesting to zoom out from recent noise and view our longer-term expectations for UK assets.

While we don’t expect significant changes in long-term asset class return expectations from quarter to quarter, since the last update, valuation-based return estimates for UK equities have fallen the most out of the major equity regions, with the exception of emerging markets.

Conversely, valuation-based return estimates for UK corporate bonds have increased while those for other major developed markets have fallen, reflecting the widening of UK credit spreads relative to other markets, while return estimates for gilts have risen in line with those for other major government bonds.

The above is an extract from our Q3 Asset Allocation outlook.