Seeking portfolio resilience amid structural shifts in markets
It’s all about managing risk effectively, maintaining diversification and staying invested through different market cycles
DEVELOPMENTS in recent years are raising profound questions on how to build resilient portfolios that can achieve steady returns through all seasons. This is the first of a series, Asia Wealth in Sight.
For decades a balanced 60-40 portfolio (60 per cent equities, 40 per cent bonds) served long-term investors well. Equities were the growth asset and bonds were the ballast, providing long-term stability and a steady income. Such is the essence of diversification – blending assets that together help smooth out volatility and achieve an optimal return per unit of risk.
But recent macro developments are seen to herald structural shifts in markets, how assets behave and their correlations with one another. No one doubts that diversification is necessary. But how well can the 60-40 allocation cushion you against the worst market shocks? More to the point, what does it take to build a resilient portfolio?
Eugene Puar, Standard Chartered head of wealth solutions (Singapore, Asean and South Asia), said: “A resilient portfolio is one that can endure short-term market turbulence while remaining focused on long-term goals. It’s not about avoiding losses at all costs, but about managing risk effectively, maintaining diversification and staying invested through different market cycles.
“The foundation of a resilient portfolio really comes down to structure and discipline… It starts with getting the basics right – a well diversified portfolio that reflects long-term goals and risk tolerance.” A strategic asset allocation serves as the anchor, he said, and provides “a strong base that can withstand volatility and deliver consistent risk-adjusted returns”.
It helps to refresh ourselves on the watershed year which was 2022. Historically stocks and bonds moved in opposite directions, and their combination was rewarding for long-term investors. A regular investment into a strategic foundation portfolio did not get the best of stock returns, but neither did investors suffer the worst drawdowns.
But then 2022 happened, when for the first time in decades, stocks and bonds fell substantially and in tandem. The S&P 500 dropped by 18 per cent, and depending on the fixed income index you looked at, bonds fell also by double digits. Losses on a 60-40 portfolio were estimated at 16 to 17 per cent.
On the face of it, one may be tempted to dismiss 2022 as a one-off event, when a convergence of macro developments created a so-called perfect storm: The US Federal Reserve hiked interest rates aggressively between 2022 and 2023. Inflation rose steeply and the geopolitical crises also caused volatility to spike.
Challenges to long-held assumptions
Since then stock markets have been on a tear, and not just in the US. Still, some key developments are challenging long-held assumptions on markets and portfolios. Here are some of them:
- Tariffs and trade tensions. These are causing a realignment of trade relations and supply chains. US growth has remained relatively robust and inflation seems muted, but there is still much uncertainty over tariffs’ impact on inflation and global growth. The IMF in its World Economic Outlook in October said it expects global growth to slow from 3.3 per cent in 2024 to 3.2 per cent in 2025 and 3.1 per cent in 2026. Advanced economies are expected to post growth of about1.5 per cent and emerging and developing economies just above 4 per cent. The IMF said: “Risks are tilted to the downside. Prolonged uncertainty, more protectionism, and labour supply shocks could reduce growth. Fiscal vulnerabilities, potential financial market corrections, and erosion of institutions could threaten stability.”
- US dollar dominance and the implications of US budget deficits. The US dollar has been the primary currency for investor portfolios. It is – and remains – the main currency for trade and central bank reserves. But the dollar has been under pressure since US President Donald Trump’s Liberation Day announcement of global tariffs. Dollar weakness is exacerbated by what is perceived as US profligacy in the form of fiscal spending and tax cuts under the One Big Beautiful Bill Act, which raises questions on debt sustainability. Earlier this year Moody’s downgraded US debt, citing a heavier debt burden and a decline in debt affordability. Trump’s threats to replace Fed chair Jerome Powell and concern over the possible erosion of the Fed’s independence if that happens are also expected to shake confidence in the US dollar and its bond market. Puar said: “A softer dollar has reshaped international asset returns and influenced regional allocations. Currency movements have reinforced the importance of considering FX exposures in portfolio construction.” “In the short term, the USD may see some temporary strength due to safe-haven flows, but any gains are likely to be limited. Over the medium term, we expect the dollar to weaken, supported by Fed rate cuts, global policy easing, and a soft landing in the US. In the longer term, structural factors like high valuations and shifts in global currency dynamics could keep the USD under pressure.” He said hedging needs to be approached selectively. “For equities, hedging USD exposure does not always make sense, as a weaker dollar can boost US corporate earnings. For bonds, hedging should be measured, taking advantage of short-term bouts of USD strength rather than attempting to hedge continuously.”
- AI investment boom and overvaluations. AI qualifies as a megatrend; its applications are game-changing for businesses, consumers and economies. Yet red flags are being raised on over-investment by Big Tech firms, whose outsized collective share in broad indexes also raises concerns over the risks of over-concentration and market fragility. Morningstar cites research by Kai Wu, founder and chief investment officer of Sparkline Capital, which compared the infrastructure spending by the Magnificent Seven companies (Apple, Alphabet, Amazon, Meta Platforms, Microsoft, Nvidia, and Tesla) today to the infrastructure buildout of the past – railroads in the 1860s to 1890s and telecom fibre optic in the 1990s. Said Morningstar with reference to Wu’s analysis: “AI will likely prove transformative, but that doesn’t guarantee good returns for infrastructure builders. As the railroad and Internet examples show, AI can revolutionise society while still delivering poor returns for investors in the companies building it. Thus, it is important to separate your belief in AI as a technology from your investment thesis.”
- Rising correlations. Correlations between stocks and bonds have settled since the spike in 2022, but they remain elevated. This has intensified the search for non-correlated assets, in the hope that their addition could enhance diversification and add to portfolio resilience. BlackRock said in a recent market insight report: “The foundational relationships that once anchored traditional portfolio construction have shifted – making many portfolios riskier overall.” The firm said a positive stock-bond correlation appears to have persisted. “Less reliable correlations undermine the diversification benefits the two core asset classes provided each other.”
Diversification for all seasons
IN THE aftermath of 2022 when stocks and bonds fell at the same time, the search has intensified for uncorrelated assets that can help to buttress the classic 60/40 balanced portfolio (60 per cent stocks, 40 per cent bonds).
Today, assets that hold out the promise of low or negative correlations with public stocks and bonds include real assets such as real estate and infrastructure, gold and private markets such as private equity and debt.
Such assets, said Eugene Puar, Standard Chartered head of wealth solutions (Singapore, Asean and South Asia), “can help reduce overall portfolio risk while offering the potential for higher returns”. He added: “Some alternatives also provide a natural hedge against inflation, generating cash flows that adjust with rising prices. Beyond financial benefits, they offer access to unique opportunities that are not available through traditional equities and bonds.”
He added: “Allocations to alternatives, private markets, and gold provide a more robust foundation, enhancing resilience, growth potential, and protection against risks not addressed by equities and bonds alone.”
Apart from lower correlations with public markets, there are other compelling reasons to consider the addition of alternatives.
First, bonds have become more volatile since 2022 and are a “less dependable source of return”, wrote Remi Olu-Pitan, Schroders head of multi-asset growth and income in an article.
Second, there has been a surge of capital into private markets, reducing the incentive for companies to go public. In the US there were more than 6,500 publicly traded companies in 1997; this has decreased to 4,700 today. This trend is mirrored in London and Germany. The median age at which private companies go public has extended from 6.9 years a decade ago to 10.7 years today. Meanwhile, Bain expects private market assets to grow at twice the rate of public markets to reach US$60 trillion to 65 trillion by 2032.
This suggests that the opportunities available to retail investors in public equities is narrowing. As they have limited access to private markets, they miss out on an important source of growth and returns. Morningstar finds that the number of non-public unicorns, defined as companies with US$1 billion in valuation, has burgeoned. There are more than 1,300 unicorns globally with a combined valuation of US$4.5 trillion.
Blackrock chairman Larry Fink asserted in his 2025 letter to shareholders that the future standard portfolio may look more like 50/30/20 – 50 per cent stocks, 30 per cent bonds and 20 per cent private assets such as real estate, infrastructure, and private credit. Here are some assets that are increasingly seen to help diversify portfolios and enhance returns.
- Private equity. PE invests in unlisted companies in various industries. PE fund managers (called general partners) typically seek to add value to their portfolio companies through operational improvements or financial restructuring, among others, with the eventual goal of an exit that achieves a multiple of invested capital. Exit opportunities may be via an initial public offer, among other avenues. Historically, PE has generated higher rates of return than public equities, thanks to an illiquidity premium.
- Private credit. This is another growing segment of private markets. Traditionally the area of focus has been direct lending as regulation and risk aversion caused banks to retreat from financing companies. But private credit has also expanded into areas such as asset-backed and infrastructure finance. For investors, private credit may offer an attractive yield, relative to government and high-yield debt.
- Gold. Market volatility has burnished the view of gold as an important diversifier in portfolio. Puar said: “Gold continues to hold strategic importance. Its low correlation with traditional assets makes it an effective diversifier, while its historical role as a safe haven can help preserve wealth during periods of market stress.” Over the past 12 months, gold has surged, underpinned by continued central bank buying, uncertainty over fiat currency and portfolio diversification needs.
- Real estate and infrastructure. Real estate is fairly accessible due to the many real estate investment trusts listed on SGX. Private infrastructure investment is an opportunity to invest in the building blocks of economies; it steps into the gap created by shortfalls in public financing. Investors typically benefit from a steady yield arising from long-term contracts, that may also serve as an inflation hedge.
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