Sourcing new diversifiers beyond fixed income

In his analysis of “regime changes” in portfolio management, Amundi’s CIO, economist and author Pascal Blanqué identifies inflation as a key trend governing the changing nature of investment portfolios. This has not really been a major economic influencer since the heady days of the 1970s, when purchasing power was constantly eroded by rising prices.

However, in the new, inflation-conscious regime of the 2020s, “bonds are no longer the dominant diversifier of the global portfolio”, he ruminates. A new set of diversifiers, including currencies of commodity producers must be injected into the portfolio mix. 

While equities will remain a “winning asset class” for Mr Blanqué , he warns of limits to this ascendancy. One restricting factor is the mispricing between value and growth labelled equities, as we progress through a decade favouring value.

Investors are also advised to appreciate the importance of China to the performance of their portfolios, making a comparison to the balance of economic power in previous decades. “China for me is the Germany of the 1970s,” he says, predicting regional dominance of the renminbi as a currency, in the same way that the German deutsche mark shaped an earlier, pre-euro era. A re-evaluation should emphasise the position of Chinese assets at the centre of portfolios, he believes.

Chinese assets not only bring effective diversification benefits, in terms of non-correlation with other economies, but they emphasise the influence of the renminbi on a much broader bloc of nations, embracing the Asean states of south-east Asia.

To take advantage of major trends, Mr Blanqué  recommends pursuit of “renewed opportunities in active management”. Portfolio managers can benefit from “the accumulation of market distortions over the last decade, due to central banks’ interventions”, he says, expecting a further divide between those countries struggling with the challenge of inflation and those able to take it more in their stride. 

“These distortions will probably reopen the space for active arbitrage and active management,” he comments.

ESG – which Mr Blanqué  describes as “the price discovery process, unleashing or unmasking inefficiencies under the pressure of fundamentals, coalitions, regulations in relation to environmental issues” – is also likely to be a key determinant of portfolio returns, he believes.

This realignment is taking place against an investment climate that is no longer about facts, but focusing more on stories. “The markets are about stories, actually, narratives,” he says. “Now we have the technological means, through artificial intelligence, to exploit these narratives, to identify them and incorporate them into our portfolio management.”

But these trends also bring with them associated risks. Indeed, the emergence and increasingly high profile of ESG investing resembles a whole “pool of risk factors”, believes Mr Blanqué , particularly around clean energy transition programmes in the quest for adapting to a changing climate. He calls for enlargement in the definition of risk, previously defined in relation to historical volatility, often of a short-term nature. 

Investors should be warned, he advises, not to disregard the dimension of liquidity, which was one of the key determinants of the practical effects of the 2008 global financial crisis, and continues to be centre stage amid today’s proliferation of alternative assets.

“I’ve been vocal on liquidity as the missing key element on top of risk and return at the global portfolio level,” says Mr Blanqué . “I think this is a critical aspect, as we saw in 2020.” Liquidity crises occur when listed assets which investors assumed are highly liquid, are not necessarily so, he suggests. 

“At the global portfolio level, there is a trade-off to manage, between keeping capital in reserve and deploying it at any moment, or immobilising it in the real assets space. This liquidity aspect is crucial in portfolio management and will prove worthy of being more systematically considered going forward.”