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In a pandemic-focused climate, managing a multi-asset portfolio requires a dynamic and adaptive approach to navigate the various risks and factors affecting global progress against Covid-19, inflation pressure, geopolitical conflicts, political instability, and market complacency.
Volatility and correlation shifts have become a critical concern since the pandemic. Historical negative correlations between stocks and government bonds, which helped in portfolio diversification, have not been stable during periods of inflation and monetary policy uncertainty. Multi-asset portfolios must consider inflation-hedging and diversification via real assets and hedge funds.
Persistent inflation combined with fiscal activism and economic nationalism is contributing to economic and market volatility, including higher interest rate volatility. This environment demands multi-asset portfolios to emphasize inflation-geared assets such as real estate and infrastructure, which serve as hedges against inflation.
Traditional safe havens like gold, U.S. Treasuries, and the dollar exhibit unusual and inconsistent behavior amid ongoing geopolitical realignments and inflationary pressures. For example, gold has surged amidst higher bond yields and the dollar has weakened, challenging conventional assumptions about safe havens and complicating risk management strategies.
Ongoing geopolitical conflicts and political uncertainty amplify market risks and unpredictability, disturbing normal asset correlations and increasing volatility. Multi-asset investors must consider these factors in portfolio construction.
Credit and sector-specific risks in fixed income also pose challenges. In securitized assets, sectors like commercial mortgage-backed securities (CMBS) face headwinds due to high interest rates, changing workplace/shopping trends, and economic softening affecting retail and office properties. Asset-backed securities (ABS) reflect diverging consumer health; higher-income groups remain strong, but lower-income consumer cohorts show rising delinquency risks, demanding selectivity and active management.
Private equity faces fundraising challenges amid a market with high capital demands but limited LP allocations, resulting in liquidity strains and caution on deploying capital. Managers use alternative structures to unlock liquidity, but pressure remains for traditional exit strategies as market conditions stay choppy.
Market complacency risks also loom large. The stabilization of volatility indexes (like VIX) after sharp moves may belie underlying uncertainty, creating complacency that could leave portfolios vulnerable to sudden shocks amid uncertain recovery from the pandemic and structural economic changes.
In this complex environment, multi-asset portfolios require a focus on diversification across assets less correlated in turbulent conditions. They should emphasize real assets and inflation protection, actively and selectively manage credit and securitized assets, be aware of evolving safe-haven roles amid geopolitical and inflationary challenges, prepare for liquidity constraints especially in private markets, and continuously monitor shifting correlations and volatility instead of relying on historical norms.
Gold is a particular focus, supported by low real yields and a negative near-term outlook for the US dollar, with the gold price having remained undervalued and subdued so far this year, presenting opportunities. However, in an extreme scenario, falling asset prices could push the world economy back into recession.
From a regional equities perspective, the United States remains preferred, but Europe and emerging markets are on a robust growth path, with the gap between the U.S. and Europe expected to narrow by the end of the year. State Street Global Advisors has recently increased its overweight in Europe, reflecting the improvement in the quantitative framework for the region. Our recent tactical asset allocation changes reflect our base case that we will see an economic recovery.
Economic and social policy must be considered when crafting a multi-asset portfolio strategy, as the current pandemic-focused climate requires a dynamic approach to address inflation pressure, geopolitical conflicts, political instability, and market complacency. To mitigate volatility and correlation shifts, investing in inflation-hedging assets like real estate and infrastructure, and diversifying via real assets and hedge funds, becomes crucial for finance management in business.
