BlackRock this week announced “reliable diversifiers are scarcer in a changing world”, highlighting the emerging truth that longer-term US Treasuries no longer offer protection during equity sell-offs.
“Yield movements have broken with pre-pandemic norms as fiscal concerns have mounted, with 30-year US Treasury yields rising as two-year yields fall … Global yields echo this pattern,” BlackRock said in its most recent market note.
All of this, the wealth manager said, is occurring against a backdrop of several anomalies, including extreme trade uncertainty that failed to trigger sustained market volatility and US Treasury yields behaving contrary to historical norms.
In this environment, gold has surged as investors look to build resilient portfolios, BlackRock said, while bitcoin, hedge fund strategies, and private assets can also offer diversification – though the wealth giant remains a bit sceptical about how reliable they really are.
Speaking to InvestorDaily, Betashares investment strategist Tom Wickenden said BlackRock’s statement “is valid” – diversifiers are in fact harder to find.
“With key market drivers recently being inflation, heightened geopolitical uncertainty, and concerns about the US deficit, there has been heightened stock and bond correlations over the last five years,” he said.
However, despite these instances of higher correlations, Wickenden argued bonds should still serve their traditional role as portfolio diversifiers if negative economic shocks occur.
Wickenden cited Betashares’ analysis showing that over the past 118 years, stock and bond returns moved in the same direction in 72 years, mostly because both were positive, while in the 34 years, equities posted losses, bonds were negative in only three. This, he said, suggests that during market declines, bonds typically provide diversification as central banks cut rates to support the economy.
“It’s our view that traditional longer duration fixed rate bonds will act as a dependable diversifier under typical circumstances,” he said, adding that another dependable diversifier is gold, especially given its ability to benefit from geopolitical risks, a lower US dollar, and falling bond yields.
Scarcity not an anomaly
For AMP chief economist Shane Oliver, scarcity is not new. He told InvestorDaily truly reliable diversifiers are rare, with most assets – including bonds, gold and bitcoin – moving in line with equities during periods of market stress or inflation.
He identified cash in safe countries, like Australia, as the only consistently dependable diversifier.
“Cash is always a safe investment so it always does provide some diversification when equity markets fall and bond markets fall,” Oliver said. “Cash is about as reliable as ever as a diversifier.”
Other assets, he said, “come and go”, highlighting gold as an asset that can act as a diversifier but one that is not consistently dependable.
“Lately, gold has been doing well as a diversifier, but it’s also correlated with shares, so gold has reached new highs but so have shares, so they’re just moving together,” Oliver said.
On bonds, the chief economist said while they have provided portfolio diversification in the past, particularly when equities fall, they can lose their diversification benefit during periods of high inflation or economic shocks.
“Anyone who was aware of the inflationary problems that surfaced in the 70s and 80s … would know that bonds and shares can sometimes be correlated together and bonds aren’t the perfect diversifier in that context,” he said.
Asked about newly popularised assets such as private credit or bitcoin, Oliver said they are unlikely to serve as reliable diversifiers because both can become correlated with equities during periods of market stress.
“We saw that in April when the tariffs [were announced], bitcoin fell. I think shares had a fall of about 19 per cent in the US and about 14 per cent in Australia from their highs … whereas bitcoin fell almost 30 per cent.”
Ultimately, he said, “I’m a bit sceptical that there’s actually going to be a new, more reliable diversifier” than cash.
‘Differentiating noise from signal’
For his part, VanEck’s CEO, Arian Neiron, said plenty of diversifiers remain, even in the current environment.
Contrary to his peers, Neiron said: “We would consider a number of diversifiers to be available and accessible for investors, including but not limited to real assets, gold, emerging market bonds, AAA-rated long duration government bonds and several smart beta strategies such as quality-factor investing.”
Despite concerns about the US fiscal position, Neiron told InvestorDaily, “US Treasuries have not been replaced”, but warned that the golden era of using long-dated Treasuries to hedge equity volatility may be over.
“However, alternatives including infrastructure, real assets and short-duration private credit may offer better risk-adjusted returns in a world where inflation volatility is structurally higher,” he said.
“Further, dynamic hedging strategies and the thoughtful inclusion of hard assets like gold as a reserve diversifier have become important tools in navigating a less predictable US dollar liquidity environment,” Neiron added.
Ultimately, Neiron advised against abandoning US dollar assets, instead recommending investors “adjust conviction and time horizons in a world where the cost of US dollar funding and the behaviour of US policymakers may be less benign and more unpredictable”.
Finally, he said when regarding commentary from market participants such as BlackRock, “differentiating noise from signal is an essential skill for investors”.
