Renaissance for 60/40 portfolios

Last year was challenging for portfolios combining equities and bonds due to the high correlation between these two asset classes. Active adjustments to these portfolios will therefore be required this year in order to restore stability.

For the capital markets, 2022 was an exceptionally weak year. The sudden and substantial interest-rate hikes aimed at tackling inflation caused bond yields to soar. And growing economic risk meant that the spreads of periphery, corporate and emerging market paper rose too. As a result, these market segments registered double-digit price falls on a par with those experienced by most equity markets, which were faced with valuation pressures owing to rising interest rates and declining profit expectations.

2022: significant losses on equities and bonds – recovery in Q4


2022: significant losses on equities and bonds – recovery in Q4
Sources: Union Investment, Refinitiv, as at 29 December 2022. Indices: DAX, EURO STOXX 50, S&P 500, MSCI Emerging Markets, each based on net returns; iBOXX Euro Sovereigns, ICE BofA Euro Corporates, ICE BofA Euro High Yield, JPM EMBI Global Diversified, each based on total returns. Details of performance are based on historical data and are not a reliable indicator of future performance. * Hard currencies.

Portfolios with a classic combination of equities and bonds therefore came under significant pressure. This has not always been the case, however, as the prices of equity and bond investments have mostly been negatively correlated since the late 1990s. In other words, when share prices fell, bond prices rose and thus cushioned the losses on the equities side. This meant that diversification was at a high level. However, high inflation in 2022 led to much closer correlation, with a fall in both nominal and real rates of return in equity-bond portfolios. At the same time, risk levels in the portfolio rose because the individual equities and bonds became more volatile. The result was a less favourable risk-return ratio.

Is it worth diversifying with an equity-bond portfolio again?

The fundamental changes in the economic environment have tipped equity-bond portfolios off balance. But relief is now being provided in the form of the recently emerged trend of falling inflation rates. This is due to statistical year-on-year effects, slowing growth, the gradual return to normality for supply chains and the braking effects of tighter monetary policy. As inflation rates fall, the pressure on central banks to take action will steadily ease and the trend for rising yields should come to a halt. Moreover, energy prices have recently started to come down again, so the recession is likely to be less severe. This supports riskier asset classes such as equities.

As a result, the prospects for equity-bond portfolios are currently looking a lot better. Yields on investment-grade bonds offer an attractive rate of return. Thanks to its strong market position, Union Investment can generate healthy profits from its placement allocation more frequently than others, collecting attractive new issue premiums in the process. The pressure on equity valuations stemming from interest rates should also diminish over the course of the year. Overall, this is positive news for equity-bond portfolios.

Bond markets significantly strengthened their appeal in 2022

High yields for new investments

Bond markets significantly strengthened their appeal in 2022
Sources: Refinitiv, Union Investment, as at 15 January 2023. * Hard currencies.

Portfolio adjustments are crucial in periods of elevated inflation

For 2023, there is a good chance that equity-bond portfolios will play to their strengths and offer more stable returns again. However, Union Investment’s economists expect inflation rates to remain structurally high for some time to come. They also anticipate stronger economic cycles, more growth and, as a result, greater volatility in the capital markets than in previous decades. In this environment, it is important to adjust equity-bond portfolios proactively and flexibly in order to reflect the new parameters. Sticking rigidly to a precise 60/40 allocation is not the right approach. By contrast, active management opens up solutions where, depending on the situation, the portfolio benefits from protection against inflation or from a more defensive positioning that offers greater diversification:

  • One such opportunity is offered by the shares of infrastructure providers, which are receiving a boost from government infrastructure programmes. Moreover, the income from infrastructure projects is often linked to inflation. These shares can therefore provide a degree of protection against inflation. Consequently, Union Investment’s equities experts currently have a preference for infrastructure shares as part of a core equities investment.

  • In an environment of higher nominal economic growth, more companies are once again managing to achieve adequate growth rates, which is an argument in favour of attractively priced value stocks. The growth factor is becoming less of a rarity, so there is less justification for paying a premium for it. Growth is no longer the dominant style. On this basis, a balanced allocation of growth and value investments is recommended.

  • In the fixedincome asset class, inflation-linked bonds can be given a slightly higher weighting. Thanks to their structure, they offer affordable protection against inflation overshoots.

  • Looking ahead, higher inflation should also support corporate bonds because the debt levels of companies with an intact business model should tend to sink. Major issuers with an investmentgrade credit rating should be particularly well placed to absorb rising refinancing costs and any adverse impact from economic cycles.


As at 17 January 2023.

More capital market news