Stress-test for rallies, not just recessions

It’s human nature to be more concerned with the negative possibilities; especially in investment. But while downside protection remains essential, markets have an equal capacity to surprise on the upside, and advisers who ignore that possibility risk missing entire cycles of opportunity.

That’s the contention of Mercer’s Andrew Stewart. Mercer’s macro stress tests, updated quarterly to reflect shifting market conditions, are designed to give advisers and clients a realistic sense of how portfolios might behave over multi-year horizons. Stewart points out that political events, such as shifts in US policy, can catalyse rallies as easily as they can precipitate declines. This broader view, he argues, ensures clients are not over-positioned for only one possible future.

The firm’s work with real assets illustrates this willingness to challenge orthodoxy. Stewart notes that listed real estate, once viewed as a defensive income play, is evolving in composition and correlation. “We’ve seen increasing correlation with equities over the last decade, higher beta, and more exposure to digitalisation via data centres and industrials,” he explains. For retirement portfolios seeking downside protection, this blurring of behaviour warrants caution.

Instead of defaulting to traditional allocations, Mercer encourages advisers to scrutinise what sits beneath asset-class labels. In accumulation portfolios, some of these higher-growth real-asset segments might fit well, but for retirement income strategies the defensive characteristics may have weakened. Stewart’s advice is to be sceptical, focus on the underlying strategies, and ensure they align with the portfolio’s purpose.

Alternative assets, particularly unlisted investments, have also entered Mercer’s portfolios in a measured way. Over the last 12 to 15 months, Stewart’s team has introduced multi-manager exposures conservatively, mindful of liquidity constraints. “It’s not about chasing yield or excessive risk,” he says, “but about structuring allocations that are robust for retirement clients”.

Looking further ahead, Mercer’s strategic research team is mapping long-term themes such as AI, robotics, clean energy and decarbonisation. For Stewart, the challenge is translating these macro trends into investable opportunities. “We’re still in early stages,” he concedes, with some allocations in place via managers, “but over time we’ll look to allocate more directly”. These themes, he adds, tend to be more capital-focused and less income-oriented, which influences their suitability for different client segments.

One area of structural change that Stewart is watching closely is the shifting correlation between bonds and equities. In recent years, US Treasuries have become positively correlated with global equities for the first time since the mid 1990s. This raises questions about the traditional 60/40 portfolio model and its diversification benefits. “It’s prompting us to explore hedge funds and global macro strategies for retirement clients,” he says.

Hedge funds, long out of favour in many retail portfolios, may now find conditions more conducive. Higher interest rates and greater market dispersion could create the kind of opportunities on which these strategies thrive. Stewart is cautious but open, describing Mercer’s current position as “part-way through the journey” of assessing their place in client solutions.

For advisers, Stewart’s message is clear; resist the temptation to rely on outdated assumptions about asset-class behaviour, be prepared to adapt portfolios to evolving market structures, and balance risk management with openness to opportunity. This approach requires constant challenge of received wisdom, backed by robust research and scenario analysis.

It also demands a client-centric mindset, one that starts with understanding life goals and then builds investment strategies to serve them. “Ultimately, it’s about ensuring portfolios are fit-for-purpose in a world where correlations shift, asset definitions evolve, and new themes emerge,” Stewart says. Mercer’s scale, research depth and disciplined implementation, he argues, give advisers a stronger foundation for navigating that complexity.

In a market where macro uncertainty, technological disruption and demographic change are all converging, Stewart’s framework offers advisers a way to stay anchored. It is a call to balance defensive prudence with strategic boldness, underpinned by evidence, agility and the confidence to embrace both the challenges and the opportunities ahead.

Laurence Parker-Brown

Laurence Parker-Brown is head of content at The Inside Network and managing editor of The Inside Adviser and Investor Strategy News.