Dynamic Asset: The Right Approach for the Times

From the Great Moderation to the Great Rotation

For the past 30–40 years, investors have enjoyed what in hindsight was an unusually favourable environment for asset prices and index investing. After the stagflation of the 1970s, inflation steadily subsided, interest rates trended down for decades, and globalisation expanded efficiency, trade, and profitability. This backdrop supercharged both equities and bonds and gave rise to the dominance of static Strategic Asset Allocation (SAA) and passive index investing.

But this “great moderation” is now over. The lived experience of most investment professionals - formed during falling inflation, falling rates, and broad global stability - no longer applies to the environment we are in today. Many investors are still extrapolating from this benign history, assuming indexed equities always outperform, bonds always hedge risk, and a static 60/40 portfolio will always deliver. That assumption is dangerous.

A Macro Backdrop Unlike the Last Four Decades

Brad Jones, Assistant Governor at the RBA, warned that:

“The great moderation is behind us. The global economy now appears more vulnerable to stagflationary supply shocks, including from the rewiring of globalisation, geopolitical and political economy tensions, and energy shocks from climate change (and related policies).”

This aligns with broader global observations. In its Global Economic Prospects (June 2024), the World Bank noted that global growth is projected to average just above 2% over the next few years—well below the 3.5–4% long-term pre-COVID average—while debt, demographics, and energy transitions add structural headwinds.

The IMF’s World Economic Outlook (April 2025) highlights persistent core inflation across advanced economies, despite sharp interest rate increases from 2022 onward. Importantly, global trade intensity has plateaued, while reshoring and geopolitical blocs reshape supply chains.

Key Structural Shifts

Inflation and Interest Rates: Inflation has come off its post-COVID peaks but remains volatile and likely to stay high. The IMF projects global inflation to remain above 3.5% on average—higher than the 2010–2020 decade’s 2% norm.
Valuations and Returns: US equities still trade at ~20x earnings, offering no clear equity risk premium relative to bonds, yet many equities elsewhere offer value. John Hussman’s long-term return models project negative excess returns for mainstream equities versus Treasuries, while investors are only now just beginning to rotate assets to better value elsewhere.
Geopolitical Fragmentation: Russia’s war in Ukraine, Middle East conflict risks, and Taiwan tensions reshape investment assumptions. National security priorities now trump efficiency, which is inflationary.
Energy Transition: The IEA projects continued underinvestment in fossil fuels and strong demand for uranium, copper, and rare earths, increasing the case for real assets.

US Equity Valuations vs Bond Yields

Implications for Portfolio Construction

The Future Fund warned in its report The Death of Traditional Portfolio Management that:

“War, deglobalisation, inflation, and rising interest rates… are challenging many of the assumptions underpinning the way investors have generated returns over the last three decades. Refreshed portfolio planning and dynamic positioning are likely to supplant set-and-forget approaches.”

BlackRock echoes this in its New Regime, New Opportunities outlook:

“Higher macro volatility is translating into greater divergences in security performance relative to broader markets. That calls for much greater selectivity and more granular views.”

In short: a static 60/40 portfolio is no longer fit for purpose. Today’s portfolio management requires a far more discerning approach.

Dynamic Asset’s Approach

At Dynamic Asset, our philosophy is clear: portfolios must adapt to conditions and not assume yesterday’s playbook applies tomorrow. Our mandates seek not just returns, but capital protection in times of stress. That means:

Active Tilts: Shifting allocations meaningfully in response to valuations, cycles, and risks and taking advantage of the cheap stocks on offer rather than buying the expensive ones.
Alternatives: Incorporating commodities, precious metals and hedge funds.
Inflation Protection: Exposure to precious metals, energy, uranium, and other scarce resources.
Risk Hedging: Gold and precious metals as structural protection in a world of recurring geopolitical shocks and intervention, fiscal mismanagement, and ongoing and escalating currency debasement.

Why This Matters Now

Inflation is sticky and structurally here to stay. Even with rate hikes, energy and supply-side shocks and ongoing currency debasement and fiscal mismanagement mean the 2% target world is gone.
Valuations are generally high but selectively attractive. Equities generally offer little excess return and bonds are no longer the safe hedge.
Geopolitical risk is real. Investors cannot assume peace and global integration as their baseline scenario. Those days are gone as the world fractures politically.

Static portfolios built for yesterday’s moderation are dangerously exposed to overvalued assets. Active, diversified, and risk-aware portfolios are not just preferable - they are essential.

At Dynamic Asset, this is what we do. We adapt. We diversify. We protect. We prosper.

The right approach for the times.

References

- IMF World Economic Outlook, April 2025
- World Bank Global Economic Prospects, June 2024
- RBA Assistant Governor Brad Jones, 2023 speech
- US Federal Reserve, "The End of an Era", 2023
- Future Fund, "The Death of Traditional Portfolio Management", 2023
- BlackRock, "New Regime, New Opportunities", 2024
- IEA World Energy Outlook, 2024
- Council on Foreign Relations, Global Geoeconomics Report, 2024
- John Hussman, "When the Bough Breaks", 2024