Getting it right: tactical asset allocation under the new regime

Setting the scene

Investors are facing a structurally different world. The era of stable growth and inflation is likely behind. We believe higher rates and greater volatility define the new regime. In the decade following the global financial crisis (GFC), investors could rely on static, broad asset class allocations for returns – and gained limited advantage from differentiated insights on the macro outlook. Today, we believe the flipside is true. Policymakers face tough trade-offs between inflation and growth – and can’t respond to faltering growth like they used to. This leads to a wider set of outcomes, creating greater uncertainty and new challenges for investors, in our view.

Major economies experienced synchronized growth in the years right after the GFC. That began to change amid the European sovereign debt crisis and trade tensions later. The pandemic hypercharged growth dispersions. Rising inflation and policymakers’ diverse actions to tackle specific challenges accelerated the trend. See the chart.

Climbing up
Volatility measures, 1963-2023

We believe the new, more volatile regime rewards a more dynamic approach to portfolios. We see a static asset allocation becoming less effective. Investment skill is more important today than in the 2010s, when high Sharpe ratios and negative correlations for stocks and bonds made it easier to build a diversified portfolio.

We believe that to get it right under the new regime, investors need to generate reliable, timely and efficient insights and calibrate portfolio exposures beyond broad directional views that worked reasonably well before. This may not be easy, but it is possible! Two veterans in asset allocation delve into the challenges and opportunities the new regime poses and the portfolio strategies they believe can optimize investment performance.