Maduro's rendition is a Franz Ferdinand moment spelling the end of the 60/40 portfolio, say these strategists

By Jules Rimmer

New realities demand new portfolios, says Strategas' team led by Nicholas Bohnsack

Supporters holding up photos of Nicolas Maduro (left) and Franz Ferdinand. A strategist says Maduro's seizure is a modern-day Franz Ferdinand moment.

The swift seizure by the U.S. of Venezuela's president ranks alongside other epoch-defining events that spells the end of a traditional asset allocation model, a team of strategists argue.

A team of strategists at Strategas, an institutional brokerage, compared the astonishing developments in Caracas last weekend represent to the assassination of Franz Ferdinand in 1914 that fired the starting gun for World War I and Russia's invasion of Ukraine in 2022.

And the upshot for financial markets of this new rupture in the global order, they say, is to sound the death knell of the conventional model portfolio of 60% stocks and 40% in bonds in order to better reflect the new, prepotent paradigm: deglobalization.

So says, the team of strategists at Strategas, a research and advisory brokerage in a note published Monday. Their recommendation to asset allocators is to up the weighting of alternative investments to make a portfolio more like 60%, 30% bonds, and 10% gold and various commodities, but perhaps raising the latter as high as 17% for those wealth managers looking for aggressive growth and capital preservation.

The Strategas team led by Nicholas Bohnsack, the co-founder of the firm, confesses that for many years the term "globalization" was something of an abstract concept but the singularity of Russia's action in 2022 suddenly crystallized the fracturing of geopolitical and economic norms. The effect has been as dramatic as that of Gavrilo Princip's bullet that triggered a worldwide conflict and brought about the downfall of three multi-century empires.

Wars ended all previously hegemonic currency regimes. Strategas speculates whether the dollar may suffer a similar fate.

The deglobalization trend has five main threads, according to Strategas: trade relations and supply chains, natural resources and the security thereof, defense spending and rearmament, technology alignment and IP sharing and populism. Fund managers must adjust their portfolios to accommodate these themes and that's why Strategas has been steadily building up exposure to gold (GC00), precious metals and industrial commodities like silver (SI00) and copper (HG00).

"Commodities have again become the instruments of power," the report asserts.

Strategas is at pains to emphasize that investors should interpret the U.S. maneuver in Venezuela as "a marker of no return," symbolizing a "permanent disconnect" of trust in the system of international law, sovereign alliances and previously accepted certainties.

"This is not the end of capitalism, democracy, or markets. What is ending is the illusion that they operate uniformly across space and time," they say.

"De-globalization reveals what was always true: some countries, companies, people, etc. operate in the favor of superior powers who harbor the ability to distribute and defend that favor; others do not," they add.

Investors who continue to allocate capital as if traditional geopolitical alliances, cheap energy, unconstrained resource availability, and unlimited liquidity remain intact are likely to misprice risk, they say. "Those who adapt to a world of fragmentation, constraint, and spatial power will likely fare better," they conclude.

The consequences of this tectonic shift and accelerated deglobalization are higher borrowing costs, fiat currency depreciation, higher inflation, and for countries failing to adjust to the new zeitgeist, Strategas warns, a falling standard of living, a loss of geopolitical influence, capital outflows and austerity.

Strategas joins other firms that argue that investors should increase their exposure to commodities over bonds.

S&P 500 futures (ES00) slipped on Tuesday after a 0.6% advance for the S&P 500 SPX on Monday.

-Jules Rimmer

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