{"id":4933,"date":"2025-09-22T09:54:13","date_gmt":"2025-09-22T09:54:13","guid":{"rendered":"https:\/\/platform.scottishwidows.co.uk\/campaign\/?post_type=digizine&p=4933"},"modified":"2025-09-22T09:54:15","modified_gmt":"2025-09-22T09:54:15","slug":"staying-the-course-why-cmas-matter-in-volatile-markets","status":"publish","type":"digizine","link":"https:\/\/platform.scottishwidows.co.uk\/campaign\/digizine\/staying-the-course-why-cmas-matter-in-volatile-markets\/","title":{"rendered":"Staying the course: why CMAs matter in volatile markets"},"content":{"rendered":"\n
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In today\u2019s fast-moving financial landscape, it\u2019s easy to get caught up in the headlines \u2013 quarterly earnings surprises, political developments, or shifting market sentiment, to name a few. These factors can all affect portfolio performance in the short term. But for investors focused on the long term, this can be distracting \u2013 in fact, there is often a disconnect between short-term performance and long-term strategy.<\/strong><\/p>\n\n\n\n

That\u2019s where capital market assumptions (CMAs) come in \u2013 a foundational input of our asset allocation approach, to provide a structured, forward-looking view of expected returns, risks, and correlations across asset classes over a long-term horizon.<\/p>\n\n\n\n

In this article, we\u2019ll walk through our approach to creating CMAs and examine how they\u2019ve stood the test of market conditions this year. Ultimately, we\u2019ll highlight why CMAs remain a cornerstone of our asset allocation approach.<\/p>\n\n\n\n

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Our approach to capital market assumption<\/strong>s<\/strong><\/h2>\n\n\n\n

We calculate our CMAs in-house, enabling us to incorporate the views of our asset allocation experts. Our CMAs consider asset class risks and interactions, and are compared against market expectations and economic indicators. This isn\u2019t a static process \u2013 we update our CMAs quarterly as part of our asset allocation modelling, and we\u2019re ready to make ad-hoc changes when markets move sharply or volatility spikes. And each year, we survey external CMA forecasts to compare assumptions, helping us identify where our views differ \u2013 whether we\u2019re more bullish or bearish \u2013 and challenge ourselves accordingly.<\/p>\n\n\n\n

We feed our CMAs into market-leading software to derive an\u00a0efficient frontier, representing the highest expected returns for each level of risk. From this, we select a point that as closely as possible to the leading risk profilers in the market. We also work with partners to understand forward-looking risks, factor exposures, and potential stresses to fine tune our positioning. Together, these comprise our asset allocation approach.<\/p>\n\n\n\n

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Capital market assumptions offer a stable and useful guide for strategic positioning, helping us stay grounded in our long-term perspective, even when markets are volatile.<\/p>\n<\/blockquote>\n\n\n\n

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Do capital market assumptions add value?<\/strong><\/strong><\/h2>\n\n\n\n

We recognise that growth assumptions are inherently subjective, and will always involve a degree of uncertainty. But starting bond yields and dividend yields are strong predictors of future returns. These provide a more objective foundation for our assumptions, even if the growth component remains more interpretive.<\/p>\n\n\n\n

More broadly though, while short-term forecasts are often swayed by sentiment and market noise, long-term forecasts offer a more stable and useful guide for strategic positioning, helping us stay grounded in our long-term perspective, even when markets are volatile.<\/p>\n\n\n\n

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Reviewing Our CMAs for 2025<\/strong><\/strong><\/h2>\n\n\n\n

At the beginning of 2025, we outlined three key assumptions. Below, we revisit each one in light of how market conditions have evolved since then.<\/p>\n\n\n\n

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1. The US market is unlikely to experience the same Trump rally as 2016<\/strong><\/h6>\n\n\n\n

When creating this assumption at the start of 2025, the high starting point for the S&P 500 left less room for the kind of rally seen when President Trump was first inaugurated in 2016. Strong profit growth among the Magnificent 7 had driven performance, and while not necessarily a bubble, we did believe this growth appeared to be priced in.<\/p>\n\n\n\n

Nonetheless, the US market has continued to rise and is now the most expensive region, representing two-thirds of market capitalisation. In our view, this makes it the<\/em> key risk to watch. The trade tariff uncertainty in April was a stark reminder of how vulnerable the market can be, and how quickly it can react to shocks. A range of factors \u2013 be it an economic shift, a company-specific issue, or a currency movement (especially a stronger US dollar) \u2013 could trigger a correction.<\/p>\n\n\n\n

Much of the US market\u2019s resilience is underpinned by the continued growth of large tech companies, which have significant pricing power. Understanding these businesses is therefore vital to understanding this market.<\/p>\n<\/div>\n\n\n\n

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2.\u00a0 The UK market is well priced, without obvious catalysts<\/strong><\/strong><\/h6>\n\n\n\n

When creating this assumption at the outset of the year, UK equities had lagged global markets for more than a decade. While the outlook for the UK remained mixed, attractive valuations offered a compelling case for long-term investors. In our view, the market appeared heavily influenced by sentiment \u2013 suggesting that any improvement in perception could help close the performance gap.<\/p>\n\n\n\n

The UK is currently performing broadly in line with global markets, despite persistent negative sentiment. But tight spreads and expensive valuations mean we\u2019re relying on growth to justify future returns. Against this backdrop, we believe UK positioning should remain dynamic rather than structural \u2013 guided by risk sources and the UK\u2019s interaction with global markets, especially in the US.<\/p>\n<\/div>\n\n\n\n

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3.\u00a0 <\/strong>Bond risks look balanced with uncertain inflation<\/strong><\/h6>\n\n\n\n

At the start of 2025, given the uncertainty on central bank policy, inflation and growth, we believed yields could move up or<\/em> down, with the yields of 4%+ providing a buffer if they did indeed rise. Credit spreads were meanwhile historically low, favouring government bonds. In today\u2019s environment, our bond assumptions remain valid if not more<\/em> compelling than before.<\/p>\n<\/div>\n\n\n\n

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Capital market assumptions are more than just forecasts \u2013 they\u2019re a cornerstone of our asset allocation process.<\/p>\n<\/blockquote>\n\n\n\n

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Final thoughts<\/strong><\/strong><\/span>

<\/span><\/span><\/span><\/b><\/p><\/h2>\n\n\n\n

In a world where short-term market movements often dominate the narrative, capital market assumptions offer a valuable anchor for long-term investing. They help us look beyond the noise, providing a structured yet flexible framework to assess risk and return across asset classes.<\/p>\n\n\n\n

CMAs are more than just forecasts \u2013 they\u2019re a cornerstone of our asset allocation process. By continuously refining our assumptions and challenging our views, we aim to build resilient portfolios that are well-positioned to navigate both current conditions and future uncertainties.<\/p>\n\n\n\n

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