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Monthly Investment Outlook - Capital Market Assumptions

Wells Fargo Investment Institute - July 19, 2021

Presenter: Veronica Willis, Investment Strategy Analyst, Wells Fargo Investment Institute

Transcript:

Title graphic: Capital Market Assumptions

Capital market assumptions, or CMAs, provide our expectations for asset-class performance and risk. CMAs reflect what we believe investors may experience through at least one full market cycle, including periods when financial markets rise and fall.

Title graphic: Developing our 2021-2022 CMAs

Our CMAs incorporate trends we expect over at least the next 10 years. We utilize a building-block approach starting with our long-term expectations for inflation and cash returns.

Graphic: Conceptual view of building-block risk premia

Using the building-block approach, we assume that investors demand compensation for taking additional risks, including term risk, credit risk, equity risk, and illiquidity.

While we believe inflation will exceed 2% in 2021 and 2022, we expect it to return to a 2% average for the remainder of the strategic time frame. We anticipate a cash discount to inflation, similar to the discount over the past 10 years.

Overall, our CMA return assumptions for fixed income are lower this year due to the reduction in cash return expectations, while returns for other asset groups reflect a positive environment for risk assets and are similar to last year’s expectations.

Title graphic: Investor implications

We use CMAs to develop strategic asset allocation recommendations that reflect an investor’s goals and risk tolerance.

This year, changes to our strategic allocations include reductions in cash and fixed income in favor of equity, commodities, and alternative investments for qualified investors. We adjusted some allocations within the equity asset group, although we continue to favor U.S. and emerging markets over international developed markets, and small caps over large caps.

We believe a well-diversified portfolio will help manage volatility over a strategic time horizon. Comparing the risk-and-return characteristics of various asset allocations may help investors choose the portfolio mix that best suits their needs.