The 60/40 Portfolio’s Overdue Overhaul
If investors’ objective is to accumulate future savings, rather than manage asset volatility, their portfolios should be constructed accordingly.
Although the bond bull market took a major detour in Q1, some stability could be nearing, which would provide some relief for both bond yields and credit spreads. In addition to outlining the potential path ahead for the global bond market, our Q2 outlook also assesses the global macroeconomic backdrop and provides a sector-by-sector outlook with associated opportunities.
With the fixed income landscape quickly evolving from one framed by reopening-fueled growth and inflation to one saddled with the unsettling consequences of war, four key themes shape our second quarter outlook:
The world’s largest economies face vastly different conditions. The U.S. is experiencing above-trend growth and uncomfortably high inflation, while China lumbers under COVID lockdowns and a real-estate overhang as Europe confronts the threat of an energy embargo that could almost certainly push the economy into recession and/or stagflation.
Central banks around the world stand at different phases of removing their virus-induced policy accommodation. The slow movers, such as the ECB and the Fed, are just wrapping up QE and starting to tighten policy, respectively, while the faster moving EM countries in Eastern Europe and Latin America remain way ahead in taking action to address inflation.
The unpredictable course of the Russia/Ukraine conflict, the global response, and the associated impacts on the world’s geopolitical order and financial system will continue to drive market dynamics.
The disconcerting backdrop may render beta an ineffective generator of returns, reinforcing the need for an expanded micro focus on bottom-up research and relative-value positioning as a reliable way to generate alpha.