Weaker Correlations Mean Stronger Opportunities for Skilled Active Managers

In the new reflationary regime, we expect asset classes to move less in tandem. This means investors with overdiversified portfolios may be at risk of losing out on risk-adjusted returns. However, weaker correlations also suggest portfolio success will be dictated by active investors selectively seeking more growth assets.

Cross-asset correlations have plunged to their lowest levels since 2006. The previous stall-speed market regime displayed pronounced negative correlations between growth and capital conservation assets. Our research suggests that these correlations will move back to levels more typically seen in reflationary or balanced times. For example, longer-term correlations between global stocks and global bonds have been close to zero, whereas they persisted near -0.4 during the stall-speed years, providing unusually strong diversification benefits. Since last summer, this relationship has already muted back to a -0.15 to -0.2 range, more typical of reflationary regimes.

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