The quarterly Dynamic Planner Investment Committee (IC) met on Thursday 25th October to review its latest capital market assumptions. Given the continuing uncertainty across the global economic and political stage, there certainly was plenty to discuss. And then there was the 30th anniversary of the 1987 stock market crash – which has inevitably generated considerable Press comparisons with the health of the current equity bull market, which is proving to be one of the most ‘unloved’ ever experienced.
However, the IC felt that the focus on equities was secondary and that the response of the global bond markets held the key to whether the equity bull market would grind higher or any potential market correction happens. The central banks’ announced unwinding of the unprecedented scale of quantitative easing measures (which is unknown territory), alongside the scale and speed of any potential interest rate rises to curb inflationary pressures will be closely followed by markets.
The recent allocation changes which reflected a controlled de-risking strategy, sanctioned by the IC went live into Dynamic Planner in early October. In summary, this involved a reduction in bonds and Asian/emerging market equities in exchange for exposure to more developed market equities and some additional cash weightings.
In this continuing environment of falling equity volatility and rising bond volatility, the IC was keen to stress that the reasoning for any asset allocations re-balancing decisions is always based on rigorous analysis of the long-term assumptions used within Dynamic Planner’s Asset & Risk Modelling framework. No attempt to ‘time’ short-term market events is included in the IC’s thinking with respect to the setting of Dynamic Planner’s model assumptions. Rather the purpose of the model is to provide an efficient set of asset allocations and a consistent framework to measure the potential scale of value at risk, so clients are provided with a range of forecast returns, good as well as bad to help base their financial decisions upon.
The chart below illustrates the trend in the excess volatility (premium) between gilts and UK equities over rolling three-year periods month by month over the last 25 years, with the horizontal red line indicating the long-term average. The grey dotted line indicates represent the statistically significant bounds of the long-term average. It is analysis of such long-term trends which is carefully scrutinised by the IC when setting the capital market assumptions.