Investment Approaches in Volatile Markets

One headwind for economic growth in 2025 is the tremendous amount of economic policy uncertainty due to current tariff activity by the executive branch. The Federal Reserve Bank of Atlanta recently shared data about the negative impact of tariffs on planned investment activity (https://lnkd.in/gstDznqp). I’ve reproduced two charts from the data they provided. Thoughts: •The top chart provides responses to the question, “How has uncertainty about tariffs, taxes, government spending, monetary policy, or regulation affected your firm’s plans for hiring/investment over the next 6 months?” Over 40% of respondents stated they would scale back hiring plans and investments in response to economic uncertainty, with less than 5% stating they would expand hiring/investment. This scaling back points to slower growth in the coming months. •The bottom chart shows responses to the question, “What is your firm’s top concern with respect to uncertainty affecting your firm’s hiring/investment plans over the next 6 months?” We clearly see tariffs dominate the conversation, with more than 50 percent of respondents noting tariffs are the top source of uncertainty. Implication: Federal Reserve survey data from N = 961 firms points to tariff-induced uncertainty causing business to scale back hiring and investment plans over the coming months. There is a tremendous body of economic literature detailing the negative effects of economic policy uncertainty in terms of investment. As I’ve stated before, supply chain managers cannot make effective plans around 90-day windows and not knowing if major policy shifts will occur with short notice. Many are anxiously awaiting news on reciprocal tariff levels come July once the 90-day pause on their implementation ends. #supplychain #economics #markets #shipsandshipping #manufacturing #logistics

One of the most concerning developments is the growing divergence between professional and retail investors. Institutional investors have quietly reduced risk, shifting toward defensive sectors and fixed income, while retail traders continue chasing speculative trades. Sentiment surveys confirm this imbalance, showing extreme bullishness among small traders, especially in options markets. With these risks building under the surface, prudent investors should proactively protect their portfolios. No one can predict precisely when the market will correct, but the ingredients for a sharp downturn are clearly in place. Savvy investors should use this period of complacency to reduce risk exposure before the cycle turns. Here are six practical steps investors should consider: ▪️ Rebalancing portfolios to reduce overweight exposure to technology and speculative growth names. ▪️ Increasing cash allocations to provide flexibility during periods of volatility. ▪️ Rotating into more defensive sectors like healthcare, consumer staples, and utilities that tend to outperform during corrections. ▪️ Reducing exposure to leverage by avoiding margin debt and leveraged ETFs. ▪️ Using options prudently—not for gambling, but for protecting portfolios through longer-dated puts on broad market indexes. ▪️ Focusing on companies with strong balance sheets, stable earnings, and reasonable valuations. ▪️ The explosion of zero-day options trading is not a sign of a healthy market. It is a symptom of an unhealthy market increasingly driven by speculation rather than investment discipline. Retail traders have moved from investing to gambling, chasing fast profits while ignoring the mounting risks. Greed is rampant, leverage is extreme, and complacency is near record levels. Markets can remain irrational longer than expected, but history tells us these speculative periods always end in a painful correction. Bull markets do not die quietly; they end with euphoric retail excess followed by painful corrections. Investors who recognize the signs early will avoid the worst of the fallout and be positioned to capitalize when value opportunities return.

For much of the post-GFC period, asset allocation benefitted from unusually supportive conditions: falling rates, ample liquidity, and reliable diversification between stocks and bonds. We believe that environment has changed as cross-asset dispersion has narrowed, starting valuations are less forgiving, and traditional diversification has become less reliable. In this Regime Change environment, incremental performance is driven less by simply owning the ‘right’ asset classes and more by how portfolios are constructed, including sizing, sequencing, and diversification across return drivers, as well as manager selection. To help investors navigate this backdrop, I partnered with Christian Olinger and David McNellis, alongside members of KKR’s Global Macro & Asset Allocation and Solutions teams, to publish updated Capital Market Assumptions across Public and Private Markets over 5-, 10-, and 20-year horizons. Three conclusions stand out: 1. The opportunity set is narrowing. The gap between the best- and worst-performing asset classes has compressed to ~7.4%, down from ~9% several years ago, making portfolio construction and manager selection more important than broad asset class selection alone. 2. Starting points matter more. Public market valuations remain elevated, credit spreads are tight, raising the bar on selectivity and disciplined risk-taking. 3. Resilience matters more. In a regime of higher-trend inflation, persistent fiscal deficits, and elevated geopolitical risk, quality is priced at only a modest premium. Against this backdrop, Private Markets are becoming more central as sources of return, diversification, and inflation resilience. So, our bottom line is that frameworks matter more than forecasts. We at KKR believe investors should rely on forward-looking assumptions around returns, volatility, correlations, and manager dispersion to build portfolios designed for long-term resilience, not precision. Read more at https://go.kkr.com/4a3dUdE

We’re only human Measures of economic policy uncertainty have eclipsed the pandemic. The largest increases are due to trade policy uncertainty and where the US will end up with regard to tariffs. Why do we care? A top 10 list 1. A “wait and see” mentality emerges. Large, hard to reverse spending decisions by firms and households are put on hold. That acts as a drag or tax on economic activity. 2. Business investment feels the bulk of the effects and contracts. 3. Credit conditions tighten, especially for those most exposed to tariffs, which further constrains investment. Even firms with plans to invest can be hobbled. 4. The banking system becomes less stable. Loan defaults pick up as the economy slows. Consumer delinquencies are already on the rise. 5. Unemployment rises as growth slips to levels that no longer enable the economy to absorb those entering the labor force. What is unknown is whether that weakness will cause a further slowdown in wage growth given the stagflationary effects tariffs. Workers tend to demand compensation for the escalation in the cost of living due to tariffs. 6. Consumer spending skips a beat. Job losses confirm fears and and trigger a larger blow to aggregate incomes and spending. 7. Financial market volatility soars and asset prices fall. People lose retirement savings and feel poorer, companies can't raise money by selling stock and loan losses accelerate. Confidence among consumers and busineses further falters. 8. Monetary policy becomes less effective as fear prevents firms and consumers from reacting to stimulus once it starts. 9. Contagion. Foreign firms and governments perceive the US as an unreliable and less predictable partner. Supply chains are reconfigured to reduce their dependence on US markets. 10. If left unchecked, sustained periods of uncertainty can trigger a breakdown of economic and political systems. Five things can help mitigate and derail bouts of uncertainty from becoming a vicious global cycle: 1. Strong institutions. They create confidence that rules won’t arbitrarily change, and work to counter the “wait and see” behaviors that curb growth. The judiciary plays a key role. 2. Clear communications by the Fed. That and a lack of political interference tempers uncertainty regarding the trajectory of inflation. 3. Automatic fiscal stabilizers, which provide immediate, predictable government response without political gridlock that can worsen a crisis. 4. Well capitalized banks, which prevent larger credit crunches from taking root. 5. International cooperation, which limits contagion. Bottom line Bouts of uncertainty trigger fight or flight reactions. That has resulted in a toxic mix of panic and paralysis. Expect whiplash, as the surge in activity ahead of tariffs borrows from growth later in the year. As for national security, that could be shored up with a targeted & strategic approach to industrial policy. Break bread not ties when possible. Be kind; pay it forward.

Just one month into 2026, a number of our base case projections for the Year Ahead have already materialized. But portfolio management goes beyond point forecasts. Now is a good time to review allocations, rebalance, and diversify—especially as geopolitical uncertainty and government intervention widen the range of possible market outcomes. So, what should investors do now to position for both a broadening opportunity set and growing risks of market volatility? -Commodities: We’ve increased our gold price target to USD 6,200/oz through September, and expect a modest decline to USD 5,900/oz by year-end. We favor up to a 5% portfolio allocation to gold as a long-term hedge against geopolitical risks. Silver remains highly speculative—so size allocations accordingly. -Currencies: Align portfolio currency with spending and liabilities. For larger investors, diversify across major currencies. Tactically, we see upside for the Chinese yuan, Australian dollar, and Norwegian krone versus the US dollar. -Tech and equities: Stay invested, but broaden exposure—beyond AI enablers to application-layer stocks, and across US sectors (financials, health care, consumer discretionary, utilities) and regions (Europe, China, Japan, US). -Fixed income: Tilt toward quality bonds and mid-curve duration; be cautious with long-duration exposure. -Alternatives: For risk-tolerant investors, add resilience with hedge funds (non-directional, discretionary macro, multi-strategy funds, merger arbitrage), private equity, real estate, and infrastructure. Market moves can create concentrated exposures that may require rebalancing. We believe a well-diversified core portfolio is the best way to position for uncertainty and protect and grow wealth. For more, read the latest CIO Alert “Taking stock and looking ahead”

Cash bond yields tempt. The small print is duration. You earn carry, but you also wear a long fuse. When the back end twitches, months of income can vanish in a day. That’s not drama. That’s math. Here’s the uncomfortable truth: most investors don’t choose duration; spreads choose it for them. A tight spread on a long bond feels safe until rates move. Then you find out your “income” was leverage in disguise. If you can’t hold through a rate shock, you didn’t buy yield. You rented risk. Carry you can keep beats yield you can’t hold. I’d rather own short-dated IG with clean balance sheets than stretch for a few extra basis points in long HY with thin covenants. I want duration where I pick it, not hidden inside credit. If I add length, I pair it with liquid hedges and clear exits. Pride doesn’t pay coupons. Cash does. The curve still matters. Front end gives you carry and optionality. The belly can work when cuts arrive on schedule, not hope. The very long bond is a tool, not a home. Use it for a reason: liability matching, a hedge, or a defined trade. Not because the yield looks neat on a slide. Know your DV01. If you don’t know how much a 25–50 bp move costs you, you’re not managing risk. You’re guessing. A portfolio that bleeds on small rate moves won’t be around for the big win. Size like you plan to survive boredom and shock. Credit spreads look calm—until they don’t. They don’t give you a countdown. They gap. If growth cools or policy bites, refinancing risk shows up fast at the weak end. That’s when owning quality feels “boring” right up until it saves the month. Boring is a strategy. Tactics I like now: keep a T-bill sleeve for dry powder. Skew to short IG over long HY. Add a measured belly position where valuations are fair. Use simple hedges instead of cute structures you can’t exit. If volatility is cheap, rent some. If it’s rich, cut size and wait. And remember: income is not a trophy. It’s a stream that needs defense. Rebalance winners. Trim length into rallies. Add only when the tape gives you paid risk, not just risk. The goal is steady compounding, not yield cosplay. Are you choosing duration, or is it choosing you? What’s your portfolio DV01 on a 50 bp bear steepener? Which bonds still pay you for the credit risk? Where would you cut first if the long end jumps? What lets you hold through a bad week without panic? For more see our Nomura CIO Corner: https://lnkd.in/e4TCax_g Appreciate @Tathagata @Anuragh @Dhrumil for the sharp back-and-forth #fixedincome #bonds #rates #duration #yield #credit #carry #treasuries #riskmanagement #portfolio #CIO #Nomura

With public equity and fixed income markets in turmoil in recent weeks the traditional 60:40 portfolio model has again been challenged. There's little doubt uncertainty will pervade these markets for the foreseeable future. Therefore it is timely to release further research on the beneficial portfolio characteristics of private market assets. In this paper "Optimising private market asset allocations" we examine the integration of this asset class within traditional asset allocation strategies to  assess performance impacts across investor risk profiles. We believe that including private market assets can significantly enhance portfolio returns for investors who adopt a risk-based utility-maximising strategy in portfolio construction. Additionally, we find that unlisted infrastructure has the most potential of the private market assets considered to improve portfolio Sharpe ratios, especially for ‘Defensive’ and ‘Balanced’ investors. Our research applies a utility maximisation framework which facilitates risk appetite aware optimisation to tailor portfolios to match specific investor risk preferences and lifecycle stages. A novel two-stage returns unsmoothing approach is used to more accurately estimate true private market return volatility. We show that even after returns unsmoothing, private markets can significantly enhance portfolio outcomes. This study finds that defensive investors benefit from allocations  to infrastructure and private credit, achieving lower volatility and higher returns. Balanced investors see similar advantages with  a stable allocation to infrastructure, while growth investors lean towards private equity for higher risk-reward profiles. This analysis adds further weight to our assertion that private market assets have a material role to play in optimising investor portfolios. With IFM Investors Economics & research Frans van den Bogaerde, CFA and Christopher Skondreas #investment #assetallocation #risk #privatemarkets #portfolioconstruction

Someone lost ₹10 lakh not in a scam, but because of one global headline. 🤔 Headlines change. Leaders argue. Markets react. And suddenly, your long-term money plan is expected to respond to a short-term event. That’s where most people go wrong. Personal finance isn’t about predicting who says what next. It’s about how prepared your money is when uncertainty shows up. When geopolitics heats up, here’s what usually happens: • Markets get volatile 📉 • News gets dramatic 📺 • Investors start questioning their SIPs 🤔 But here’s the boring (and useful) truth 👇 Volatility is not a financial emergency. Poor planning is. So how should you treat your money in times like this? 1️⃣ Stick to your SIPs Market noise is not a stop signal. It’s the environment SIPs were designed for. 2️⃣ Recheck your asset allocation If one headline can disturb your sleep, your portfolio is carrying more risk than you realize. 3️⃣ Keep an emergency fund untouched That money is for life surprises, not market emotions 💸 4️⃣ Quality over excitement Strong businesses and simple funds survive political noise better than hype. 5️⃣ Think in years, not news cycles Politics is temporary. Compounding is patient. 🧠 Personal finance works best when it’s boring, disciplined, and repetitive. It doesn’t react to every headline. It respects time. The goal isn’t to outsmart geopolitics. It’s to build a money plan that doesn’t break because of it. P.S. Be honest do headlines change your investment decisions more than your plan? 💬

Why Needing to Pee is the Secret to Great Investment Performance Behavioral finance has long examined the influence of the mind on financial decision making, but could bodily needs be just as powerful an influence? Consider this: hunger doesn’t just drive us to the fridge—it pushes us to take bigger financial risks. Fascinating studies reveal that hungry individuals crave more than just food; they desire money and make riskier financial decisions. This trait isn't just human; animals do it too. When sated, they play it safe, but hunger drives them to explore and take risks, all in the hunt for food. Dana Smith reports on this phenomenon, explaining that both animals and humans show a marked difference in behavior when hungry. When animals are sated, they avoid risks, but hunger flips the switch, prompting bold exploration. This evolutionary trait likely developed to help find new food sources in times of scarcity. For humans, this translates to an increased desire for money and a willingness to take riskier financial bets when hungry. The interplay between physical needs and financial decisions doesn't stop at hunger. A surprising study from the Netherlands, led by Mirjam Tuk, explored another facet of this connection. Researchers wanted to see if bodily urges could affect decision-making in unexpected ways. Participants were split into two groups: one consumed 700ml of water, and the other just 50ml. They were then given a choice: a small immediate reward or a larger reward after a longer wait. The results were astonishing. Those who drank more water and had a stronger urge to urinate were more likely to choose the delayed, larger reward. This suggests a fascinating concept called "inhibitory spillover." The idea is that the self-control needed to resist using the bathroom spills over into other areas, enhancing overall self-restraint and patience, even in financial decisions. So, what's the takeaway? Our bodily states significantly influence our decision-making processes. Hunger can drive us to take risks, while the need for physical restraint, such as holding in urine, can make us more patient and better at delaying gratification. This intriguing connection between our physiological and psychological states opens up new ways of understanding and potentially improving our financial behaviors. Next time you find yourself making a big decision, consider what your body might be telling you. Whether it's a grumbling stomach or a full bladder, your physical state might just be playing a bigger role than you think.

What if pre-seed investments are just a basket of call options? In the public markets a call option has a simple payoff: you can only lose the premium you pay, but your upside is unlimited. Because the downside is capped and the upside expands with uncertainty, the value of a call option increases when volatility rises. Similarly at pre-seed, your downside is capped by the amount you invest, but the upper tail is wide open. And market volatility? Just think about AI diffusion, regulatory uncertainty, geopolitical fragmentation and new industrial policies…. Whilst ‘the future is uncertain’ is uncomfortable for market incumbents, it can actually expand the possible "outlier" outcomes for founders building from scratch. And it has implications for early-stage investors too: 1. Over-filtering for “de-risked” ideas narrows the upside. I believe that when everything looks too tidy too early, you’re usually selecting for predictability rather than potential, which compresses the range of possible outcomes. 2. High-variance sectors often create the strongest outliers. Markets with genuine uncertainty tend to produce a few companies that break away from the pack, precisely because they’re not yet fully understood or crowded. 3. Founders who thrive in dynamic environments outperform those optimised for stability. Rapid learning, adaptability and resilience matter more than polish when conditions shift quickly. 4. Optionality compounds at portfolio scale, not deal by deal. The real power of early-stage investing comes from backing many small bets and letting the few that break out more than cover the ones that don’t. And on the latter point, my own experience reflects this. Back in 2013, I invested £25k into EF2, an early Entrepreneur First cohort. That single cheque translated into exposure across eight companies. Only Echobox and Permutive are still trading, but a six-figure secondary from Permutive covered my whole EF2 investment many times over. Here a broad set of early, high-variance bets created a meaningful outcome (and why I’m now repeating this experiment with the Conception X angel syndicate). In summary: Later-stage investors need predictability. We as pre-seed investors actually benefit when the world is noisy and unpredictable. In that sense, we’re not just backing early ideas, but also taking deliberate exposure to the very upside that volatility creates.