Allison Nathan: This is a tough time to be managing a portfolio. While equities have been volatile and highly responsive to headlines about the conflict in Iran, the assets that allocators traditionally use for diversification and hedging have really not been doing their job. So, what's the best way to navigate this environment? Is it time for investors to consider a new approach to balancing their portfolio? And in the meantime, what tactical opportunities might be cropping up?

I'm Allison Nathan and this is Goldman Sachs Exchanges.

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Today I'm speaking with Christian Mueller-Glissmann, head of asset allocation in Goldman Sachs Research and Alexandra Wilson-Elizondo, global co-head of Multi-Asset Solutions in Goldman Sachs Asset Management. Alexandra is here in our New York studio while Christian joins me from London. Welcome back to Exchanges both of you.

 

Alexandra Wilson-Elizondo:     Thanks for having me.

 

Christian Mueller-Glissmann:  Thanks so much for having us.

 

Allison Nathan:   So much has happened since the last time we talked. So, I'm looking forward to this conversation. Christian, let's start with you. Our listeners, of course, are very familiar with the headline-driven moves that we have seen across global equities over the last few weeks and beyond. But let's talk about what's going on with assets like bonds and gold. We typically think of those assets as playing somewhat of a balancing role to equities in a portfolio. But they haven't really been serving that role. So, what's going on?

 

Christian Mueller-Glissmann:  Yeah. You're absolutely right. It's been not easy for multi-asset portfolios and it's a bit of a déjà vu, similar to 2022 where I guess inflation is the culprit here. We know that a 60/40 type portfolio can do a very good job in buffering growth shocks. But I think when you have a stagflationary shock or an inflation shock, I think they struggle. And I think that's what we've seen this time around.

I think equities have been, to some extent, doing better than you would expect. And it's really because it's been more of a rate shock than a growth shock. So, there were stagflationary elements. But I think the rate shock has been more prevalent. And that weighs more on bonds. And it weighs more on gold. And so, you can see this disconnect that I think a lot of our investors are puzzled about that equities are making all-time highs, but the kind of balancing assets throughout haven't been doing really well.

There are a lot of other reasons. I think with equities in particular, what we've noticed is that they're increasingly less linked to the economy and if you have a stagflationary concern about the economy, that matters a bit less to the S&P these days because if you look at the market cap, like 60 percent of the S&P market cap is actually TMT. So, technology, media, telecoms. And on top of that, financials. So, 60 percent in that. And if you add energy exposed sectors, you're at 70 percent.

So, you can see that if you have a stagflationary shock, equities can do a bit better here because 30 percent of the market cap might be suffering. But 70 percent is actually less badly exposed. And both TMT and financials had their own quite positive drivers throughout this period.

So, putting it all together, you could say that the multi-asset portfolio approach has not really done that well mainly because of bonds and gold, because they were trading more the stagflationary shock, whereas equities actually were able to decouple a bit from the stagflationary fears.

 

Allison Nathan:   Alexandra, let me bring you into the conversation. How have you been navigating this environment as an investor? And if you think about the opportunities though that are most compelling, where do you think the tactical opportunities exist?

 

Alexandra Wilson-Elizondo: I would say just to contextualize tactical right now, the velocity at which the market is moving is really eye opening. So, things that you used to be able to step into over a couple of weeks, the P&L materializes in hours. And I would reference tactical opportunities being-- I do still agree that AI has a lot of opportunity. I think it's outperformed the index right now to the tune of 14 plus percent. So, I would wait for a bit of a better entry point on the public equity side.

And I think on the rates side, because there was such a strong conviction in interest rate cuts happening this year, people got caught offsides. And there was a lot of tactical opportunity as you saw that flushed through the system. And you still are seeing small gyrations of that with the headlines on oil prices and in what's happening in the Middle East. I'd say that those are some of the real short-term tactical opportunities. But the more structural opportunities, and it's not that we don't believe in AI. We do. But it's become such a dominant feature, a factor risk across almost all of our asset classes, that we're looking for things that give you true diversification, less correlation against that.

 

Allison Nathan:   Christian, what do you think about that? Where are the tactical opportunities with this structural backdrop?

 

Christian Mueller-Glissmann:  Yeah, as I mentioned at the beginning, it does feel like the growth exposed, the cyclical exposed opportunities, they've done really well. There's a bit less opportunity there, you have to become a bit more selective. As Alexandra said, you have to be careful about some of the speed of the moves you have here. And I would say that rates relief is still an area where there is more potential because if you do actually get deescalation in the Middle East conflict, we do know that the market has priced a much more lingering rate shock. And there will be opportunities to fade the kind of more hawkish central bank pricing and opportunities related to that.

We've got to be a bit careful because that can be very supportive for some of these structural growth opportunities. Historically what we've found is that tech tends to benefit from rate relief. So, there is symmetrical risk in some of these high velocity parts of the AI ecosystem. But rates relief has been a big focus.

The other area to us is, we just have to be clear that while there's hopes for a peace deal, there is clearly potential for inflation to be more sticky because there's stickiness in oil prices at higher levels. But also, the whole value chain around energy and oil and commodity products has been disrupted. So, we will only learn over the next few weeks and months how that feeds into inflation and into core inflation.

So, what we find quite interesting is real assets. I think you mentioned gold earlier. But generally, the whole real asset spectrum, despite the pickup in inflation, hasn't done very well. And that often is the case in an early kind of inflationary shock. Usually, especially if it's oil, the only thing that does well is whatever causes the inflation. And you have winners and losers depending on oil importers and exporters. And then eventually, as the inflation becomes more entrenched, traditional real assets like gold, infrastructure, TIPS, all of those do a bit better. And we think that period might still be ahead of us.

And we've found, actually, some of the best performances for infrastructure, like listed infrastructure, tends to be when inflation is falling from elevated levels. Not when it's rising. So, if you have that pick-up in inflation and it's falling for the rest of the year, it might actually create some rates relief for infrastructure. And real cash flows might be supported by the level of inflation. So, we've been quite focused on that.

And the last thing I will say, also to Alexandra's point, is momentum. We're dealing with some of the most extreme positioning and shifts in momentum stocks. So, you've got to be a bit careful. I think the fundamentals for those stocks have been, in a lot of cases, in the driving seat. So, it's not easy to lean against the momentum. But we would still say that the risk of a momentum reversal has picked up.

So, what I always say, there are two value adds an asset allocator has, either market timing or diversification. In this case, I would focus on diversification of momentum. And what we've found is, for example, low volatility stocks are very negatively correlated with high momentum stocks. And we do find they've also lagged a bit because of the rates shock. So, you do have an opportunity, maybe, to scale and overlay low vol stocks in a portfolio to take down a bit of a tech setback risk. So, these are a few of the things we've been looking at.

 

Allison Nathan:   Alexandra, that point on real assets, how are you thinking about that addition to your portfolio at this point? Is it changing at all? Are you as optimistic as Christian in terms of that asset class potentially performing better ahead?

 

Alexandra Wilson-Elizondo:     Yeah, I think I'll loop in infrastructure and real estate as sort of like the same category. As it relates to being an inflationary hedge, it's done well in the portfolios. I think more specifically, infra has taken on a life of its own as it relates to owning the constraint on AI, meaning how much capacity do you have in power? How much capacity do you have for forward compute? Things of that nature. And so, if you want to own the constraint on AI, it's a great place to be. And we would continue to say that these are sectors that do give you broader diversification.

I agree with Christian that this is a moment in time where you have to be really thoughtful about what's going to drive the next five to 10 years of a portfolio return. And the diversification has actually taken on a different sort of architecture, if you will.

And in reference to some of the things that he spoke to, when you look back at this period, all of the things that you normally would have had in your portfolio, even away from rates, which actually created the most volatility in your portfolio, but rates, gold, Swiss franc, defensive stocks, all of them did not give you what you needed in this environment. And so, yes to the point of we need to be really thoughtful about what's happening, what's driving forward GDP, and how do we put some of those elements into our portfolio to give diversification for what has become an extraordinarily volatile type of backdrop.

 

Allison Nathan:   And oil really has been the best diversifier in this environment, no?

 

Alexandra Wilson-Elizondo: Yeah, to Christian's point, in the moment when oil is spiking and that's creating the tension in the market, it's oil that you have to use to hedge your portfolio.

 

Allison Nathan:   But if we see some deescalation in this conflict, then we would expect oil's role to diminish. And how do we think about owning the oil complex, the commodity complex as part of a portfolio ahead, separate from this disruption?

 

Christian Mueller-Glissmann:  Yeah, I would say that as Alexandra mentioned, at the early start of a geopolitical conflict, oil has a very good hit ratio, especially if it's a conflict in the Middle East, to diversify portfolios. But we know oil is incredibly volatile. And that means over the medium term the Sharpe ratios you get from direct commodity investment and direct oil investments are never really good.

So, you want to look at it more as a tactical tool generally in these periods. Now we're coming obviously to much more symmetry with regards to the conflict or possibly even more deescalation potential than escalation potential. So oil is not any more as convex in potentially protecting you. It's much more symmetric. And it still has the same volatility. So, you only accept an asset which has really high volatility on a tactical basis when there's real convexity. When the volatility is in your favor. And I'm not sure that's the case anymore for oil. So, from that perspective, one wants to be selective.

Having said that, obviously, oil has come down. And if you look at energy-related assets, they have repriced similarly fast. So, if you look at energy equities, if the pressure extends in the next few days and weeks, there might be an opportunity to kind of more from a longer-term perspective say, "Listen, this is an opportunity to revisit commodities in my portfolio via energy assets, via selective commodity-related strategies." So, we are currently discussing a lot with clients commodity carry strategies, which is a much more high sharp ratio version of allocating to commodities. It's essentially harvesting backwardation in the curves.

And if we live in a world where commodity supply is more constrained, you could have more structurally steeper backwardation curves, higher roll yields in commodities. That's interesting because it has very low correlation with equities, very low correlation with bonds. And actually, quite a low vol/high Sharpe ratio.

And the other thing which we are looking at is trend following. Commodity trend following, but broadly trend following historically has been very good in capturing some of these periods, and also year to date. CTAs have actually performed quite well, which is quite common in periods where inflation is more elevated.

So, I think we do look at the commodity complex strategically. But I think tactically, just oil right now I would say has a slightly different asymmetry compared to at the beginning of the conflict.

 

Allison Nathan:   So, Alexandra, we've covered a lot. What are the risks you're watching that investors should be focused on?

 

Alexandra Wilson-Elizondo:     So, from a what keeps me up at night? I'd say that the probability of these is not equal. But what they have in common is that they're very high velocity impact. I think the feedback loop between the labor market and the equity market would be really harmful this time around because there's such a large percentage of retail owners in the equity market right now. So, meaning you lose your job, you're not going to want to be as long equities. You can see velocity trade down with that.

I think as it relates to leverage in the system, and in particular there are so many people talking about private credit, for me it's more about spaces where you have leverage and you don't have control. Meaning you can't augment a business model, you know, compete against a rapidly changing technological world. That makes me nervous.

And last but certainly not least, it's the amalgamation of all of these different factors happening at the same time as an AI winter. Now, I put a very low probability on an AI winter. That being said, many of the conversations we have is "how does one assess the AI factor in their portfolio?" And I think you won't really know until you see that real drawdown on what is the dominant theme across, just not GDP, but across almost all markets.

 

Allison Nathan:   Interesting. And Christian, risks that are on your mind?

 

Christian Mueller-Glissmann:  Yeah, somewhat similar. I would say we had a stagflationary shock. Stagflationary shocks are often not as problematic for cash flows. Earnings for the equity market have held up really well, partially because of the compositional things I mentioned earlier. Also in 2022, actually earnings in Europe and the US didn't fall. It was all down to the discount rate for equities. So, we're less worried about the cash flows here. We're worried about the discount rate. And there are three things that can get the discount rate up.

One of them is that inflation turns out to be much more sticky. And what we've seen so far in this rate shock, it was much more in shorter-dated rates. Longer-dated rates have been relatively well behaved. And longer-dated inflation expectations have been relatively anchored. So, if you get more sticky inflation, the risk of longer-dated rates breaking out, we've seen this before in the last few years, is picking up. We've already seen the 30-year yield in the US pushing towards 5 percent and above. I think that eventually can create a bit of a speed limit for equities because equities are more longer duration. And especially with the structural growth equities leading the market, they are becoming a bit more longer duration. So, sticky inflation we need to watch.

And it links a lot to the conflict. If the conflict continues, the risk, obviously, of more lingering and sticky inflation picks up. So, I think that's not completely gone until we have a real clarity on a deal.

And the second two factors, one of them Alexandra mentioned already, it's the labor market. We've just got to keep watching that very carefully. Both with the feedback loop with retail investors, but also, we know that equity and credit investors like to put more risk premium on cash flows when the labor market is weakening because a weakening labor market for a few months always increases the risk for recession. So, while we are seemingly quite far away from that with the labor market having been quite stable, that could come back because it could also come from the whole AI impact. So, the labor markets have been weaker. So, that's the second thing we're watching.

And the third thing is the AI ecosystem where we had this enormous momentum and we had, obviously as a result of that positioning build up and the disappointments there, which can be linked to all kinds of things. It's always very difficult ex ante to pinpoint to reversal risk here. It could be something completely unrelated to tech. I give the example of Kospi around the Middle East war. You had the 20 percent drawdown in a week, even though the fundamentals were good. But there was a major positioning unwind. I think the risk of positioning unwinds in this momentum trade; they are certainly worrying us tactically as well.

 

Allison Nathan:   So, some things to worry about. But ultimately, I think the big question really is if we think about that 60/40 approach to portfolio construction, which hasn't been working so well, do you think that begs revisiting this approach for investors going forward?

 

Christian Mueller-Glissmann:  Yeah, exactly. I think that's what we've been arguing for some time now, really since 2022. And I think to us, when we think about the world long term, it's always a fight between innovation and inflation. And I think in the last 15 years, in the last cycle, innovation has won. And that's very good for equities. That's very good for 60/40 portfolios. It creates negative equity bond correlations. It does create good Sharpe ratios for financial assets.

The challenge is really in the last few years we've seen more inflation. And that means that needs to be addressed in portfolio construction because it impacts also risk mitigation. And what we always say, and it's very nice to remember because it rhymes, like a portfolio in the next decade needs to address exposure to innovation, protection from inflation, and better risk mitigation. And I think in each of those buckets, we've discussed a few things right now like what we like tactically. And some of these opportunities are also strategic to allocate more to real assets, to increase protection from inflation, to use factors to improve risk mitigation, to use selective alternatives to improve risk mitigation. So, that really helps you, to some extent, improve a 60/40 portfolio to deal with this more challenging macro backdrop.

 

Allison Nathan: Alexandra, anything to add?

 

Alexandra Wilson-Elizondo: Yeah, I would agree that it's not about abandoning the concept of 60/40. It's modernizing what the 40 represents. And Christian spoke to so many of them. But things that we're very focused on are not just owning the front end of the curve and rates exposure, but having better rates volatility expression in the portfolio. Having more convexity to the upside and protecting you on the downside. Because that's the world we're living in when you have more inflation in the backdrop. And again, it's not abandoning the concept, but being thoughtful about what it means to construct for a forward.

 

Allison Nathan:   Thanks again, Alexandra and Christian.

 

Alexandra Wilson-Elizondo:     Thanks so much for having us.

 

Christian Mueller-Glissmann:  Thanks for having us.

 

Allison Nathan:   This episode of Goldman Sachs Exchanges was recorded on Thursday, May 7^th, 2026. And as always, keep up with the latest market moves and opportunities with our weekly companion podcast, The Markets. New episodes are released every Friday on all major podcast platforms. I'm Allison Nathan, thanks for listening.