Charles-Henry Monchau

Following the US election, we kept our preference for equities over bonds, as has been the case throughout the year. We also kept our allocation to US equity markets, while maintaining or reinforcing an underweight position in Europe and emerging markets, faced with weak domestic demand dynamics and risk from global trade tensions.

Investors face an asset allocation conundrum going forward: Trumponomics will likely lead to higher nominal growth, higher inflation and a higher level of uncertainty. High inflation also creates an environment where the equity/bonds correlation itself is more volatile and not always negative, ie where bonds do not necessarily provide portfolio diversification to the equity allocation.

Higher asset price volatility plus a higher equities-bonds correlation equals higher risk. To maintain the risk-return ratio constant, investors need to increase risks (ie maintain higher equities allocation or increase allocation into alternatives). This comes at the price of higher volatility or lower liquidity in multi-asset portfolios.

Stabilizing an Unstable Economy, Hyman Minsky; 1984, George Orwell