The Unending Global Crisis: How Should We Invest? - WSJ

[By Myungjeong Seon, Block Media] In an era of constant crises marked by wars, trade conflicts, and climate disasters, traditional investment formulas may no longer apply. With the defensive power of government bonds, which have historically served as safe assets during recessions, weakening, there is a need for new asset allocation strategies that utilize stocks, gold, and alternative investments.

On the 12th (local time), The Wall Street Journal (WSJ) reported that traditional "stock-bond" diversification strategies are being shaken as global geopolitical conflicts and inflation shocks recur. The analysis suggests that the investment environment has changed, with economic shocks occurring more frequently due to strategic competition between the U.S. and China, conflicts in the Middle East, and supply chain instability caused by climate change.

When War Erupts, Both Stocks and Bonds Shake

Recent tensions surrounding U.S. and Israeli airstrikes on Iran starkly illustrate this change.

In the past, when geopolitical crises occurred, investors often flocked to government bonds, causing bond prices to rise and partially offsetting stock losses. However, recently, wars and supply chain disruptions have triggered inflation, leading to simultaneous declines in stocks, bonds, and even gold.

WSJ diagnosed that as the U.S. no longer plays the role of the "world's police" in managing global order, competition among great powers intensifies, and extreme climate phenomena increase, investors must prepare for economic shocks that occur much more frequently than before.

"As Risks Increase, Higher Returns Are Needed"

In response to these changes, global institutional investors are also restructuring their investment strategies.

Raphael Arndt, CEO of Australia's Future Fund, assessed that geopolitical risks, increased government intervention, and populist politics have created a new investment environment since COVID-19.

He explained, "We had to redesign existing investment principles from scratch. The conclusion was surprisingly to increase the proportion of stocks. To bear the increased risks, higher expected returns are necessary."

The Future Fund is also increasing its allocation to alternative investments, such as hedge funds that seek returns regardless of market conditions, while reducing reliance on bonds.

Changing Role of Bonds: "A Time of High Interest Rates Is Normal"

The market interprets the reason for government bond yields being maintained at higher levels than in the past in the same context.

Raman Srivastava, CEO of Insight, a BNY Mellon asset management firm, identified the potential for high inflation similar to that of the 1970s and 1980s as the biggest risk.

He recommended a strategy favoring inflation-linked infrastructure bonds while reducing the proportion of long-term bonds. With increased price volatility, it has become difficult to view bonds simply as safe assets as in the past.

WSJ analyzed that the reason investors demand higher yields from bonds is also because bonds no longer serve as effective defenses during downturns as they once did.

Geopolitical Risks Are Often Underestimated

Experts point out that the financial market often fails to adequately reflect geopolitical risks, which is a recurring phenomenon.

Mike Bell, market strategist at RBC BlueBay Asset Management, stated, "Markets often do not fully price in geopolitical risks until actual events occur, even when those risks are clear."

In fact, even before Russia's invasion of Ukraine, the mobilization of troops was widely known, but after the full-scale invasion, international oil prices surged by about 30% within a week, and U.S. stocks entered a bear market.

Bell advised that investors need to continuously monitor military tensions and geopolitical movements and be prepared to quickly adjust their portfolios if necessary.

Volatility Is the New Normal

However, some analyses suggest that the role of bonds has not disappeared in all situations.

WSJ explained that as the excitement around AI investments cools and a traditional recession phase appears, U.S. government bonds may again serve as safe assets. If both the economy and prices slow down together, the investment attractiveness of government bonds could increase.

However, in an environment where shocks accompanied by rising prices continue, such as wars, trade conflicts, supply chain breakdowns, and climate change-induced agricultural production disruptions, experts agree that managing risks solely with past investment formulas is challenging.

WSJ reported that in an era where geopolitical conflicts and inflation risks are prolonged, more flexible asset allocation strategies that include gold and alternative investments are becoming increasingly important than traditional diversification relying only on stocks and bonds. Investors are now at a point where they need to redesign their portfolios to fit a new environment where "crises are the norm" rather than the assumption that "crises are temporary."

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