In the post-great moderation world, institutional investors are facing a radically new environment. The underlying assumptions that have driven many investment strategies over the last 40 years must be reexamined. This paper explores nine implications that can help empower investors with the agility needed to navigate the uncertainties of the new economic environment.
Key themes
- A post-great moderation world is a volatile world
- Beware the declining utility of global cap-weighted allocations
- Should government bonds be considered a risk asset?
- Lower expected returns are a thing of the past
- Appreciate the scarcity value of real assets
- AI is a double-edged sword when it comes to inflation
Nine considerations for investing in the new regime
Against a new macroeconomic backdrop, institutional investors are reassessing many of the well-established assumptions and practices that allowed their portfolios to flourish during the great moderation.
Dynamics within countries have shifted alongside an evolving interplay between fiscal and monetary policy. Dynamics between countries have also evolved as many prioritize national security and self-reliance over collaborative global economic growth. Investors are now confronted with major questions, such as the persistence of long term inflation, whether risk-free assets exist, where to source diversification, and how to best harness expected returns across assets.
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