With intelligence spoke to H2O AM’s CIO (Group & Monaco S.A.M), Vincent Chailley, about why foreign exchange has become the diversifier of choice.
The relationship between bonds and equities has been one of the cornerstones of portfolio construction for decades. Is that still valid?
It’s become much less reliable. The pre-Covid decade was defined by quantitative easing, low inflation and falling rates — and in that world, bonds and equities diversified each other predictably. The post-Covid regime is structurally the opposite. Inflation is higher and more volatile, and that changes everything. Bonds can no longer be assumed to hedge equity risk reliably, because inflation shocks can hit both asset classes simultaneously. We saw that again during this recent episode — since the onset of the Middle East crisis, sovereign bonds didn’t merely fail to protect portfolios, they came under meaningful selling pressure at exactly the wrong moment. The traditional flight to quality has become far less automatic than it once was
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