A growing shift in global market dynamics is transforming the fundamentals of asset allocation, pushing investors to reconsider long-held assumptions about diversification, risk, and long-term strategy.
Andy Black, director of product management, and David Suarez, director of innovation for portfolio analytics research, at LSEG recently held a detailed conversation on the evolution of asset allocation.
For decades, asset allocation has centred on creating balance—managing risk and reward while navigating short-term fluctuations and long-term growth objectives. Yet the environment underpinning these decisions has changed dramatically. A period defined by globalisation and market integration is giving way to rising protectionism, economic fragmentation, and a more volatile geopolitical landscape.
These shifts are forcing a reassessment of how investors manage risk. Global decoupling is reshaping diversification, prompting portfolio managers to assess exposure at a country-specific level rather than relying solely on broad regional assumptions. Meanwhile, style drift is becoming more important to track, as it can introduce hidden risk without robust governance frameworks. Technology, particularly real-time analytics, is now playing a central role in enabling adaptive and granular portfolio oversight.
The trend towards fragmentation—referred to as the “great decoupling”—marks one of the most significant market transitions in half a century, they said. Economic blocs that once moved in tandem are now diverging. Events such as Brexit, escalating tariff disputes, and shifts in US-China trade relations have exposed the limitations of regional groupings like “Western Europe” or “North America.”
Investors now face questions around whether these traditional baskets still offer meaningful diversification, they explained. Fixed income, currency allocation, and commodity exposure are all being affected. At the same time, governments are increasingly reshoring industries, tightening capital flows, and applying new trade restrictions, adding further complexity.
The uncertainty extends to the very definition of safe haven assets. The long-trusted 60/40 portfolio has struggled to deliver expected downside protection, with bond markets no longer reliably offsetting equity volatility. Investors are looking more closely at commodities, real estate, and alternatives, though each come with their own constraints—from liquidity issues to sensitivity to macroeconomic cycles.
Technology’s role in navigating these structural changes cannot be overstated. Modern asset allocation requires agility, underpinned by data-driven insights and real-time analytics. AI-powered assessment tools allow risk to be monitored continuously rather than periodically, helping firms respond to evolving conditions with greater precision.
Stress testing and scenario modelling have also become foundational. Asset managers must now simulate a range of geopolitical, economic, and market outcomes to understand portfolio vulnerabilities. Those who can identify potential shocks early and adjust strategically will be best placed to thrive.
For more insights, read the full discussion here.
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