Global markets are adjusting to new realities and investors are adapting the way they think of their portfolios accordingly. As we rethink capital allocation models, we first consider the macroeconomic backdrop in the context of systemic adaptation to longer term imbalances. We then offer more practical insights for portfolio considerations
Over the last 50 years of continuously falling interest rates, the financial industry designed strategic asset allocations and implemented 60/40 type portfolio models, toolsets and industry norms based on the flawed assumption that stocks and bonds
can offset each other. This may now prove to no longer be fit for purpose given the need diversification tools and a broader toolset.
Over the last 5 centuries, the evolution of our economic model was based on the structurally flawed assumption that natural resources, and our capacity to pollute, are unlimited and therefore have no value. As these are increasingly recognized as being limited and therefore of having a value. The black and white lens through which financial markets scrutinize our economic models is therefore no longer fit for purpose and require a new multi colored lens when reflecting this. Pricing natural capital across all investment activities will require a more sophisticated toolset with new investment vehicles and structures.
Incorporating a new toolset is therefore necessary to ensure long term capital preservation and environmental considerations are no longer a question of altruistic aspiration. We are excited about the transparency being enforced by regulators but are weary of the distraction this may have from the required underlying adaptation needed across the investment value chain. We take a step back and re-assess the lenses and toolsets needed to adapt to a more complex paradigm in the context of market direction, market dynamics and risk factor positioning.