Generative AI will transform the 60/40 portfolio strategy. Getty Images
Generative AI could change the 60/40 portfolio strategy, according to US investment bank Morgan Stanley.
Because AI will increase productivity and thus change the relationship between growth and inflation and the correlation between stocks and bonds.
“Technology diffusion acts as a supply shock, boosting growth and often reducing inflation in the short term.”
This is a machine translation of an article from our US colleagues at Insider. It was automatically translated and checked by a real editor. We welcome feedback at the end of the article.
The latest area of your life that generative AI is changing? Your investment portfolio.
According to US investment bank Morgan Stanley, the AI boom has the potential to transform a central tenet of investing for the ordinary moderate-risk investor: the 60/40 portfolio.
This strategy – investing 60 percent of the portfolio in stocks and 40 percent in bonds – has been touted as the basis for investing since the 1950s, but has been increasingly questioned in recent years. And now another aspect comes into the debate: artificial intelligence. Because technology could increase productivity so much that the correlations between growth and inflation and between stocks and bonds could be reversed.
Morgan Stanley analysts no longer believe bonds are a good diversifier
“Technology proliferation acts as a supply shock, boosting growth and often reducing inflation in the short term,” Morgan Stanley analysts wrote last month.
As a result, previous assumptions about risk diversification may no longer apply, as the AI boom will deliver good returns in both stocks and bonds, eliminating the negative correlation between the two.
This undermines a key element of the 60/40 strategy. “In other words: bonds will no longer be the good diversifier they were over the last three decades, as they were this year,” the analysts write.
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Correlations between stocks and bonds versus correlations between growth and inflation. Morgan Stanley Research
The inverse correlation between stocks and bonds occurred in the 1990s during the dot-com boom, analysts said. The explosion of information and communications technology accelerated capital investment, reduced business operating costs, and increased wealth, leading to higher consumption.
“Similar to ICT, AI – particularly generative AI – has the potential to improve productivity across all sectors,” the analysts said.
Debate over the 60/40 portfolio intensified as government bond yields rose
The 60/40 portfolio debate intensified after a historic bond market meltdown sent Treasury yields soaring. This came after the US Federal Reserve aggressively raised interest rates to curb the post-pandemic inflation spiral. As a result, the 60/40 portfolio did not experience spectacular returns.
Asset manager BlackRock called the 60/40 portfolio obsolete due to the new high-yield era and said investors now need to be more “nimble” and “granular.” US financial services provider Vanguard stated that the strategy will deliver big returns next year.
For its part, Morgan Stanley explained that the impact of generative AI on growth and inflation is just one of many factors that could influence correlations between assets.
“If this proves to be true, we believe it could mean that portfolios become more equity-focused than bond-focused over the long term, as fixed income is less reliable as a diversifier. In this context, we think investors could look for new portfolio diversifiers,” the analysts write, adding: “We could also see further acceleration in asset managers putting funds into private credit, which in theory is less related to public equities and fixed income Securities correlate.”
Read the original article Business Insider.
Disclaimer: Stocks and other investments generally involve risk. A total loss of the capital invested cannot be ruled out. The articles, data and forecasts published are not a solicitation to buy or sell securities or rights. They also do not replace professional advice.
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