Holding a traditional investment portfolio of stocks and bonds is no longer sufficient to protect wealth in view of the ongoing Middle East conflict, according to JPMorgan Private Bank.
The investment bank said in a report that the traditional 60/40 allocation of equities and debt is failing, as the closure of the Strait of Hormuz has resulted in a structural shift toward inflationary pressures.
It noted that throughout the 2020s, consumer prices in the US alone surged more than a quarter, but the core fixed income (bonds) yielded only 5%.
Since stocks and bonds have simultaneously sold off since the Iran war broke out, J.P. Morgan argued that protecting one’s wealth via the two asset classes alone is no longer a viable strategy.
“Rolling shocks are structural, not cyclical, and stocks and bonds alone are no longer enough,” the bank said.
“With both bonds and stocks selling off meaningfully since the conflict began, investors need a broader toolkit – one that includes real assets, active strategies and a disciplined plan built to withstand inflationary pressure, not just ride out a cycle.”
The company recommends instead that investors gain exposure to real assets, including infrastructure, real estate and commodity-linked equities, as well as hedge funds that have historically delivered higher returns during inflationary periods and offer returns when both stocks and bonds struggle.
“Commodity-linked equities, global infrastructure and real estate offer inflation-resilient cash flows and have historically delivered 8% to 12% annualised returns across different inflation regimes,“ said JPMorgan.
“Macro hedge funds and relative value strategies – which delivered positive returns in 2022 when both stocks and bonds fell – remain an important complement,” said Stephen Parker, Co-Head of Global Investment Strategy.
(Writing by Cleofe Maceda; editing by Seban Scaria) seban.scaria@lseg.com