Investment Strategy 2023: How professionals deal with the current challenges of financial markets

Turbulent market environment 2023

Due to record inflation in many countries, leading central banks are following the most aggressive interest-rate hike cycle since the 1980s. This has advantages and disadvantages for the economy and consumers. While loans or loans, for example, are becoming significantly more expensive, the interest rate hikes have made fixed-interest securities or call money accounts new attractiveness. Savers receive on Current daily allowance (as of May 2023) for six months guarantees around 3% interest. In addition, after a long dry spell, investors are now being rewarded with higher yields on bonds, particularly on short-dated government bonds.

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Has the traditional 60/40 investment strategy had its day?

However, due to the distortions and reorganization on the markets, the tried and tested 60/40 strategy is no longer working. It is based on the inverse correlation between bonds and stocks and the assumption that when the price of one rises, the price of the other falls. However, this 60/40 approach — a cornerstone for many asset managers for more than 30 years — no longer achieves the desired return: According to Data from asset manager BlackRock lost around 16 percent of the value of a portfolio designed in this way in 2022because the prices of stocks and bonds fell at the same time. For example, this had an impact on 60-40 portfolios, which consist of 60 percent of US equities and 40 percent of US government bonds.

This development is particularly remarkable in a historical context. Because since 1929, there have only been three years in which bonds did not rise while stocks fell. In particular, the episode from 1969 to 1970 is perhaps the most relevant in this context. Because back then, a combination of many factors, including loose monetary policy, generous fiscal incentives and disruptions in energy supply, triggered a decade of high inflation.

However, over the next two years, the spread between gains and losses for a 60/40 portfolio could be considerable UBS experts warn. High single-digit real returns would be possible primarily if the economy grew strongly and inflation remained moderate. Negative real returns could occur if there was a deep recession or stagflation.

The most important lesson: Bonds can be a reliable diversifier when economic growth slows — but not necessarily when inflation rises or at least remains at persistently high levels. Because this would force the US Federal Reserve to raise interest rates further, which could cause share prices to plummet and the value of bonds to fall. Even if - as of May 2023 - they achieve the highest returns in over ten years.

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Asset allocation of institutional investors

Die Strategists from the BlackRock Investment Institute, the research department of the world's largest asset manager, therefore recommends “breaking up traditional 60/40 asset allocations and moving away from broad allocations to public stocks and bonds.” “These old assumptions don't reflect the new system we're in — one in which major central banks raise interest rates well into recession to lower inflation,” the strategists say.

That is similarly reluctant Financial Services Firm Fidelity with regard to stocks and bonds. The volatility of company shares is likely to remain high in Q2 2023 due to uncertainty about the development of the global economy, increased capital costs and interest rate movements. In the case of (high yield) bonds, the risk of a hard economic landing has not yet been fully priced in. Credit conditions are tightening, and the weighted average cost of capital is rising. Refinancing is becoming more expensive for companies, and rising interest rates are already having an impact on mortgages and loans.

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How private investors should position themselves now

However, the goal for investors remains to build a more resilient portfolio through diversification. However, despite the current rise in interest rates, return targets cannot generally be achieved with fixed-income securities alone. Institutional investors are therefore increasingly expanding their positions in alternative investments such as private equity, real estate, infrastructure and alternative tangible assets. Because of their low correlation to traditional asset classes such as equities and bonds, alternative investments can cushion inflationary and recession-related fluctuations and offer attractive return opportunities.

In addition to inflation-protected government bonds, these include (alternative) tangible assets such as gold, real estate or collectibles. However, real estate and collectibles in particular have so far been reserved primarily for institutional or wealthy private investors as portfolio components. Thanks tokenized tangible assets However, retail investors can now also benefit from the return opportunities of selected assets starting at just 500 euros and, for example, put together a diversified portfolio consisting of digital shares in real estate, classic cars, art or luxury watches.

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