Late-cycle dynamics and low-risk portfolios

With interest rate hikes and ‘quantitative tightening’, the end of the economic cycle draws nearer every day. How do you manage low-risk portfolios and mitigate the ‘nightmare scenario’?

The end of the economic cycle draws nearer every day. Tightening central bank policies and increased volatility have fuelled fears of the next economic contraction. Investors can look to multi-asset solutions and portfolios to establish a lower risk holding during these times. However, we believe that many world economies are still in the mid-expansion phase and that assets still have some potential for further growth. Nonetheless we remain alert to the risks, in our own low-risk funds, of the ‘nightmare scenario’ – where equities and bonds fall simultaneously.

Though it might not always feel like it, the global economy is heating up. To put this into historical context, since 1945 expansionary periods have typically lasted between two and fve years. The stimulus policies of the major central banks can take credit for maintaining the expansion. As one of our LGIM economists likes to analogise, it takes longer to cook a pizza from the freezer than one from the fridge, and following the fnancial crisis, the economy was well and truly frozen.