The policy mix has changed materially versus the 2010s – and that has profound implications for how we build strategic asset allocations.
No longer seen as the bureaucratic blob, the state can direct, coax, and crowd-in private investment and boost productivity. The old risks of the 2010s are replaced with a new set of challenges: higher taxes, inflation, and a more empowered labour market. We already see a significant degree of ‘mission-ness’ in the US and Chinese policy agendas.
How investors build portfolio resilience for a mission economy will be a critical decision. The most fundamental rethink needs to be about the role that government bonds play in our portfolios. As the balance of economic risks shifts, bonds are destined to lose their property of being cheap hedges.
The solution for investors is not straight-forward, and there is no silver bullet. But one idea is to find new portfolio diversifiers among a broader universe of alternative asset classes.
We should look to get as close to real, inflation-protected cash-flows as possible. Infrastructure debt is a strong candidate. As are allocations to commodities such as copper (the oil of the mission economy), other key minerals, or to carbon offsets.
A more conventional allocation would be to look to Asian bonds as a substitute for global bonds. Renminbi onshore bonds embed higher yields and lower correlations to equity markets. Or Asia high-yield credits, which benefit from higher spreads and lower default rates.