Real resilience

Supercharged structural trends will change the nature of portfolio diversification. Countries and sectors will make a comeback as diversifiers in a more fragmented world, in our view, offering resilience to real economy trends.

Going private
Growth in private markets, 2000-2019

View our Midyear Outlook in charts

• Structural shifts are challenging the resilience of portfolios. With the policy revolution pushing yield curves close to their lower bounds, we see government bonds providing less diversification benefits in strategic allocations.
• Many assets are vulnerable to the physical and regulatory implications of climate change and other sustainability-related risks. The pandemic has sparked concerns about fragile supply chains and companies’ social license to operate, accelerating a trend toward sustainable investing.
• China and the U.S. are intensifying their strategic rivalry across multiple dimensions, resulting in an increasingly bipolar world. Investors need to balance the investment case for gaining exposure to both poles with possible investment restrictions on each side. Greater geopolitical fragmentation means that portfolio resilience will have to be driven by deliberate diversification across countries and regions.
• Investors need to embrace uncertainty in this environment. Our methodology for constructing portfolios explicitly takes into account fundamental uncertainty around long-term mean returns. The coronavirus shock only underscores the importance of uncertainty for building portfolio resilience.
• Private markets, which are not suitable for all investors, offer this potential. Managers have a say in structuring the investments – and can add custom-made resilience as a result. Private markets can give investors exposure to emerging technologies and other real-economy trends that is not available in public markets, in our view. And they are bigger and deeper than ever. See the chart above.

Bottom line: Structural portfolio resilience is much more than just relying on broad asset class correlations in public markets. It’s making sure the portfolio is well positioned for underlying themes.

Strategic implication: We favor sustainable assets, private markets and deliberate country diversification.

Tactical implication: We have increased our overweight in the quality factor and favor assets with policy backstops.