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As investors rethink, strategists suggest ‘macro resilience’ approach


Like a synchronized roadmap in stocks and bonds this year change the outlook for 60-40 portfoliosSome strategists see an opportunity for a new and improved investment framework.

MSCI, in conjunction with GIC – a sovereign wealth fund of the Government of Singapore – this week suggest an alternative solution for major stocks and fixed-income mixes that have long been favored by long-term investors: an asset allocation that integrates macroeconomic risk considerations.

With inflation near a 40-year high and the Federal Reserve the most aggressive path of interest rate hikes in decadesWell-known 60-40 portfolio composition of stocks and bonds is improving for worst return this year in a centurydisplay data.

A screen shows Federal Reserve Chairman Jerome Powell's statement following the US Federal Reserve's announcement as a trader works on the trading floor of the New York Stock Exchange (NYSE) in New York City, USA, September 22, 2021. REUTERS / Brendan McDermid

A screen shows Federal Reserve Chairman Jerome Powell’s statement following the US Federal Reserve’s announcement as a trader works on the trading floor of the New York Stock Exchange (NYSE) in New York City, USA, September 22, 2021. REUTERS / Brendan McDermid

As investors weigh new options, MSCI and GIC have released a report recommending a “macro-resilient frontier” portfolio. It will aim to better consider the constraints of possible macroeconomic shocks – such as those that have occurred over the past year – while integrating private wealth and placing them “on par with each other.” ” with public assets to help manage risks and long-term returns.

First and foremost, as suggested by the companies, this strategy will lead to a shift from “outdated, short-term risk measures” to tools that can assess macroeconomic uncertainties. ever-increasing scale changes the current investment landscape.

“Some of these macro risks – including supply-driven inflation, less reliable central banks, rising real rates and slowing productivity growth – have been modest risks in recent decades but could dramatically change the trajectory of the market in the coming years.” report authors Peter Shepard of MSCI and Grace Qiu Tiantian and Ding Li of GIC.

That view was also expressed by BlackRock strategists earlier this year, when they argued that secular macroeconomic changes had set out a “new regime” for investors.

The team at MSCI and GIC suggest that macro-risk coverage in private assets can help manage long-term risk across broader portfolios – but especially when used appropriately in parallel. along with other asset classes.

A set of tools for long-term asset allocation.

A set of tools for long-term asset allocation. (MSCI, GIC)

“Private assets can play an important role in diversifying long-term risk, but doing so requires placing private assets on par with the rest of the portfolio and understanding the scope of the investment. micro-exposures they add to portfolios,” the report said.

To do so, the companies propose modeling the sensitivities of individual asset classes to the five scenarios in the chart above, which could shape the macro regime over the coming decades: a shock to with demand, supply, growth trends, central bank policy and long-term real exchange rate. It also means no longer categorizing assets into overly simplistic categories, like stocks for growth or real assets for inflation protection.

For example, once considering individual macro risks rather than generalizing them, the asset mix of a “macro resilient portfolio” will move away from traditional bonds and into infrastructure like bonds and TIPS, or Treasury inflation-protected securities.

Finally, a macro-resilient portfolio would aim to reduce nominal bond exposure and increase exposure to real assets and equity risk premiums, a excess returns that reward investors for taking on a relatively higher risk when investing in stocks.

“Fundamental macroeconomic dynamics provide a common lens to view all assets consistently and intuitively, allowing comparisons and trade-offs between public and private markets,” said MSCI and GIC said in the report. “The multi-horizontal nature of the framework also allows for decision making over different time periods, potentially facilitating strategic and tactical positioning.”

Alexandra Semenova is a reporter for Yahoo Finance. Follow her on Twitter @alexandraandnyc

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