Asset Allocation: Key Economic Indicator

This strategy is intended to show the influence of the single most important economic factor. For each asset class an appropriate economic time series has been chosen that best explains total returns. The most suitable time series will also vary depending on the investment perspective under analysis. Buy & sell signals are represented by red arrows embedded in the price index.
 
It is designed not only to show the historic relationship but also to provide a Best Guess as to the future trend, based on our econometric models.
 
For comparability, indices have been rebased to set year-end 1994 at 100. Please note the differences between charts in the Assets RouteMap and those for other RouteMaps. Since income is a major consideration for investment in some asset classes but not others, all indices are shown as total return and not in terms of price only, so as to make them compatible. 
 
The index is shown as the thick white line on the right hand axis. The explanatory variable, the economic factor, shown as the thin yellow line, uses the left hand axis as does the Best Guess for its future development, shown as the thin orange line. Buy & sell signals, that rely solely on data already published, are represented by red arrows embedded in the price index.
 
Best Guesses suggest what would happen to future performance for each asset class based on our econometric model, tested over 15-25 years of historic data, which utilises consensus estimates for GDP, interest rates, wages and prices.
 
Both historic data and Best Guesses should be treated as general indications of trend only. Even though these are the best relationships that can be consistently applied across all markets, correlations may be poor for some asset classes in some regions. In other cases correlations of past performance may be good, but the modelling is subject to a high degree of uncertainty in its ability to predict future developments.
 
Irrespective of forecasts, back-tested past performance of this strategy for each asset class shows that even the data already reported can be an effective way both to raise returns and to reduce risks.