The oh-so-popular post-war 60/40 portfolio is worn out - passé. So say many asset allocation strategists. The alternative is 60/40/20: equities, bonds and alternatives. Nay, says Zoltan Pozsar, strategist at Credit Suisse. The future is the 20/40/20/20 portfolio, consisting of cash, equities, bonds and commodities. He explains why in his formidable analysis War and Peace.
Zoltan Pozsar (photo), global head of short-term interest rate strategy at Credit Suisse, previously worked for the US Treasury and the Federal Reserve. Early last year he predicted a new world order in which no longer the dollar but currencies of resource-rich, Far Eastern countries will become dominant.
In his series of analyses, he argues that there is currently “a hot war in cold places” (cyberspace, space and underwater) and “a cold war in hot places” (the Sahel and Pacific islands). Pozsar speaks of four wars, over interest rates, industrial policy, commodities and currency. In doing so, he refers to six fronts, such as Russia’s financial blockade (Swift), Russia’s energy blockade of the EU, the US technology blockade of China, China’s blockade of Taiwan, the US blockade of the EU through the Inflation Reduction Plan and China’s attempt to entice energy-producing countries in the Middle East to replace the petrodollar with the petro-renminbi.
Investing ‘no longer a piece of cake’
These are all geopolitical risks that investors are no longer quite sure how to place in their asset allocation and portfolio constructions. After all, since World War II, investing was “a piece of cake” with the US-dominated world order.
All the events of 2022, according to Pozsar, show that the idea that post-WWII is “stable” is outdated. The strategist at Credit Suisse argues that the Pax Americana is now being actively challenged by the “arsenal of autocracy”, being a form of war that causes inflation, hitting industry, making commodities more important, hitting new financial channels (cryptos etc) and hitting all prices of money: static value (par), interest rate, exchange rate and price level. If inflation is above target, there is no stable policy.
Democracy under pressure
Source: Statista
Polycrisis
Pozsar believes that all four prices of money are in crisis and thus there is a so-called polycrisis. Its denouement, he says, is closer than we think. By mid-2023, the Federal Reserve will be forced to restart the policy of quantitative easing (QE) as the percentage of government debt to be consumed by the market is higher than at any time since the two world wars. Pozsar does not see the market buying that excess debt. Instead, he expects investors to divert to equities, credits and emerging markets. It could then, he says, come to a new QE combined with yield curve control by the Federal Reserve in late 2023.
That scenario that Pozsar of Credit Suisse paints, he says, makes investors have to move out to a 20/40/20/20 portfolio, being cash, equities, bonds and commodities. The latter category should then have the colours yellow, black and white: gold, oil and lithium (for electric cars). Commodities should also be allocated to copper, cobalt, etc.
De-dollarisation
The prelude to an endgame does not mean that the dollar will be dethroned, at least not in the foreseeable future, and certainly not against the other developed markets. But de-dollarisation does accelerate through a combination of currency digitisation and a new global infrastructure emerging around the BRICS+ countries, which more and more states are voluntarily joining. It is the non-democratic countries - many of them resource-rich - that are gearing up for the new world order that pleases them, according to Pozsar in his analysis War and Peace. The 20/40/20/20 portfolio is the answer to that.
This article originally appeared on InvestmentOfficer.nl.