China, Interest Rates, and the Call for Multi-Asset Portfolios

Note: This article appears on the Strategist Channel

By Bryan Novak

If you caught the recent Bloomberg article about the upcoming meeting between Chinese officials and Fed Vice Chairman Stanley Fischer, U.S. Treasury Secretary Jacob J. Lew and other U.S. officials, you may have been struck by how much influence China has gained, even in the wake of last year’s meltdown. Economic policy is the topic on the table, and with the China and U.S. economies more intertwined than ever, the two countries both have a lot at stake.

If the Fed raises interest rates this summer—a move that’s looking somewhat more likely than even a month ago—the Chinese are worried about an exodus of capital that could damage their already ailing economy. Further, movement in the currency markets has everyone on edge. If the Chinese economy takes another dive, U.S. markets may again feel the aftershock. What’s more, Christine LaGarde, the managing director of the IMF, publicly “pleaded” with Janet Yellen in 2015 to hold off on rate hikes. The relationship of domestic monetary mandates and global economic stability is growing ever opaque.

From the Fed’s perspective, their goal is simple (if not so easily achieved): manage the stability of the U.S. economy. If domestic inflation hits the 2% target, interest rates will almost certainly rise. But as globalization increases and emerging markets and economies like China mature, that process isn’t as simple as it once was. Just ask Janet Yellen.

Related: Getting Tactical for the Long Term

For investors, this shift has similar implications. As the influence of global economies and events on the stock market has grown, the approach to building successful portfolios is not as straightforward as it once was either. Investing is no longer just about equities or fixed income—or at least it shouldn’t be. To drive returns and address diversification in today’s global economy, investors need a more balanced and highly diversified portfolio that includes a wider range of assets, including equity and fixed income, as well as alternatives such as global currencies, commodities, futures, real estate, and more.

The value of a multi-asset portfolio

There’s no doubt that in today’s changing economic climate, multi-asset portfolios can add more value than ever. First and foremost, there are diversification benefits to holding multiple asset classes as behaviors and market responses differ across asset, solely based on the fact that there response vary to stimuli such as interest rates/inflation, economic activity, and the risk environment. Based on these premises, strategies that actively adjust these exposures can provide value to a portfolio as well. Unlike Janet Yellen and the Fed, portfolio strategists have the luxury of driving their own policies based on global economic trends. As market shifts occur, portfolios are able to adjust accordingly. Having the flexibility to construct portfolios that move across and within asset classes, multi-asset portfolios can take a tactical approach to asset allocation that can help reduce volatility within a portfolio and mitigate the impacts of asset-specific drawdowns.