In this month’s market commentary, Mike Bell, Head of Market Strategy, delves into the question most investors ask themselves – is my portfolio truly diversified, and how would it perform if today’s biggest market winners became tomorrow’s biggest losers?
How diversified is your portfolio really? For example, if it turns out with the benefit of hindsight that we're currently in the middle of a tech bubble that goes on to burst, or if political shifts lead to local government bond crises in maybe France or the UK, how would you expect your portfolio to perform?
It strikes me that within equities, many investors have got a huge exposure to tech. Often when they think about diversifying away from that US tech exposure, they look to Europe. But Europe seems structurally challenged by the rise of Chinese cars, and of course, is struggling with tariffs from the US. So it probably makes sense to look beyond just adding to Europe when trying to diversify equity exposures. But within emerging markets, there's, again, a few stocks that make up a large tech exposure. Again, I think it makes sense to diversify one's emerging market exposure beyond just those few tech stocks, which are also heavily related to AI.
Within the fixed income part of portfolios, I think a broadly diversified approach across different fixed income assets makes a lot of sense. If you go back to 2000, at the peak of the dot-com bubble, investors over the next 10 to 15 years would actually have been better off in emerging market debt or high yield, along with government bonds and investment grade credit for portfolio diversification, than having a heavy exposure to equities. But one thing that really does strike me is that within a lot of clients' portfolios, they have this heavy home bias. That means that if political volatility strikes, leading to potential crises in their local government bond or corporate bond markets, they're not as diversified as they perhaps think they are. Diversifying both globally within fixed income and looking to add absolute return strategies can help broaden portfolios and diversify better.
To discuss this more, please reach out to your RBC BlueBay sales contact. And I look forward to discussing it in more detail with you in the near future.
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