Market Focus: Asset Class and Risk Premia Valuations
Valuations for major asset classes have come off of extreme highs versus a few months ago, but continue to be expensive relative to historical norms. U.S. equity valuations remain high after benefitting from positive sentiment following the surprise election of Donald Trump, but other asset classes are no longer trading at extreme valuations.
Considering Risk Premia Valuations
We prefer to evaluate investment opportunities in terms of risk premia instead of asset classes. This method enables us to focus on the risk factors that drive asset class behavior and not the asset classes themselves, which may be highly correlated due to overlapping risks. When considered through a risk premia lens, most major asset classes appear fairly priced today—as they did three months ago (see Chart). This analysis supports modest over- or underweight positions we may take based on other factors such as macroeconomic or risk conditions.
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