by Marina Gardiner, Research Editor, Elston Consulting
Since the “polycrises” of recent years, we are learning to live with inflation and live with volatility. Ensuring that a portfolio is sensibly allocated and diversified should help to mitigate the adverse effects of political or economic shocks. A properly diversified approach designed to fare reasonably in all market conditions is known as an ‘All-Weather’ strategy. 
Renewed political leadership chaos combined with persistent concerns around whether UK government debt levels are sustainable in the long-term has sent Sterling lower and UK Gilt yields higher.
This article looks at the dynamic nature of bond market volatility. What it means for portfolio construction. And how short-run measures help spot the canary in the coalmine.
The traditional 60/40 balanced portfolio is facing a structural breakdown as resurgent inflation and soaring government debt turn nominal bonds into an unsafe asset class. When asset correlations rise and real returns turn negative, traditional diversification methods fail to protect client outcomes. Discover the three strategic levers asset allocators must pull to reinvent their bond allocations and build true all-weather portfolio resilience.
Contrary to the old adage, when it comes to investing, desperate times do not necessarily call for desperate measures. In fact, far from it. Ensuring that a portfolio is sensibly allocated and diversified should help to mitigate the adverse effects of political or economic shocks such that the knee-jerk reaction to get out of the market can be resisted: an ‘All-Weather’ strategy.
When constructing multi-asset portfolios for DFMs and advisory firms, our process at Elston begins with four primary categories: equities, fixed income, cash & equivalents, and alternatives. We classify any investment that falls outside the first three groups as an alternative. The fundamental motivation for including this category is diversification so it is essential that we verify that the holdings in question are actually fulfilling that role. 
Higher inflation means lower real returns on bonds. UK gilt yields look attractive on paper, but once you strip out inflation expectations, investors are getting less than 1% in real terms. For some, that's reason enough to look beyond the traditional 60/40 portfolio.
When inflation is on the rise, nominal assets such as Cash and traditional Bonds (Gilts and Corporate Bonds), lose their real (inflation-adjusted) value.
The face value of the coupon they pay every 6 months, and the promise to repay the holder a face value of £100 in 10, 20 or 30 years time, looks increasingly less valuable than the paper its written on. Bonds and Cash cannot adjust for inflation. That’s why a £5 note buys you less than it did 10 or twenty years ago. 
By Henry Cobbe CFA, Head of Research at Elston Consulting.
Elston Consulting provides asset allocation insights and fund research to UK-based investment managers and financial advisers as support to their investment committees. For UK investment managers and financial advisers only In this article we explore the Iran conflict’s impact on the economy and the stock market. In a related article we explore why Trump started the war with Iran.
In this video, we explore how the recent Iran conflict is creating a new oil and energy shock — and what that means for the global economy and investment markets
In this video, we break down the rapidly evolving Iran–US conflict and explore how a major geopolitical shock has unfolded with far‑reaching consequences for global stability and financial markets.
by Henry Cobbe CFA, Head of Research, Elston Consulting
How to ensure portfolio resilience
We explored this topic in our recent CPD webinar - within and across each asset class. But given recent geopolitical events, it makes sense to look under the bonnet of the VT Avastra Global Diversified Assets fund (which we consult to), to consider what alternative asset class exposures can act as the best shock-absorbers to 1) structural change from AI, 2) rising geopolitical tensions in the Gulf and 3) the debasement trade. For these, we turn to what we have named the "COGs" for a portfolio - Copper, Oil and Gold. 
Ensuring portfolio resilience begins with recognising the shifting macroeconomic backdrop and understanding how different asset classes respond under stress. Dispersion has become a defining feature—across regions, sectors, and asset types—so a one‑size‑fits‑all approach no longer suffices. Instead, resilience requires a dynamic assessment of risk, correlation, and forward‑looking inflation and productivity expectations. The core idea is to construct portfolios that are not only diversified in name but diversified in behaviour, particularly in periods of market strain when correlations can spike unexpectedly. This means focusing on selective equity exposure, balancing duration and real yields in fixed income, and embedding genuinely diversifying assets and strategies that behave differently in different market regimes.
A bloody start to the year
The beginning of the year saw pro-regime change protestors being brutally and lethally crushed. Trump threatened Iran with intervention if the crackdown didn’t stop leading to an uneasy truce. 
Are equity markets in an AI bubble? Is AI a bubble? These questions crop up everywhere – from client meetings to magazine covers – and reflect a broad sense of unease. When people ask about “bubble trouble,” what they really want to know is whether markets have become dangerously detached from reality. Here’s how we at Elston think about it: what the data shows, what history suggests, and – crucially – what we’re actually doing in portfolios.
The Debasement Trade: A Narrative
One of the big themes that has quietly but steadily emerged over the last twelve months is what market watchers have come to call the debasement trade. It didn’t begin with any single dramatic event; rather, it built slowly from ideas that long pre‑dated today’s political headlines. Even before Trump returned to power, one of his advisers had laid out the blueprint in a paper dubbed the “Mar-a-Largo Accord” - a proposal centred around a coordinated dollar devaluation aimed at making the American rust belt competitive again. |
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