Multi-Asset Insights

Exploring the consequences of the economic regime shift

• A key element that allowed a traditional equity / bond portfolio to thrive post 2000 was a reliably negative correlation between the two asset classes. But in 2022, correlations between equities and bonds reached much higher levels than in the recent past, close to pre-dot-com, bubble levels, leading the traditional 60/40 portfolio to suffer one of its worst years in history
• Given existing pressures on both growth and inflation, investors should be prepared for a more volatile relationship and rethink portfolio diversifiers
• Among possible options available to asset allocators, inflation-linked bonds could be of interest for those who anticipate that we could face another inflationary episode in the years to come - current implied inflation curves are close to flat
• Similarly, gold remains a reserve asset of choice for those playing the long game and want to limit their exposure to duration, credit and liquidity risks
• Within equity allocations, value stocks continue to suffer so far this year but might be set for a comeback, supported by additional capital expenditure in infrastructure and duplication of supply chains

Opportunities and challenges around thematic investing

• As investors look for new approaches to portfolio construction, and tools to improve performance, thematic investing has attracted increasing attention
• On the bright side, thematics are forward looking (versus market cap based allocations) and can provide excess return above traditional equity beta. But they can also exhibit strong factor biases – particularly small cap and growth – versus equity markets, and are prone to elevated volatility and drawdowns
• Put simply, thematics have potential to add value in typical asset allocations, but they can also reveal disappointing results if not managed as part of a disciplined framework that captures key considerations – such as theme momentum, company fundamentals and diversification