For the last several months investors have had to navigate a very dynamic macro landscape… the War in Iran and throughput from the Strait of Hormuz; inflation, sovereign long rates, and monetary posturing and net policy positioning; and, A.I. capex spending trends, expectations, the enterprise use case, and increasingly frequent comparisons to previous bubbles, to name a few.  Viewed independently, each of these threads present as measured risks, manageable, even investable to the capable macro handicapper.  And inasmuch, investors continue to interpret them as cyclical fluctuations – another geopolitical shock, another inflation scare, another technology boom. That understates what is occurring beneath the surface.  The investment landscape is becoming increasingly polyfragile; independent systems that were once stabilizing now reinforce one another – for better and worse.  We see the breakdown and replacement of long-held and long-relied upon geopolitical, economic, and social operating conditions as the dominant thematic scaffolding of the next decade.  If this is the correct read, how should investors view portfolio construction today and in the future?

To navigate the impact across two disparate time horizons we have structured current positioning in our Global Macro Allocation portfolios and our Strategas Macro Thematic Opportunities ETF (SAMT) around five themes: 1) Cash Flow Aristocrats; 2) Artificial Intelligence; 3) Energy Power Renaissance; 4) De-Globalization; and, 5) Analog Edge.  The balance embraces both shifting pockets of cyclical strength and concern with structural considerations too important to not have on our radar.

In the near-term, there is no need to become acutely defensive, but a maturing cycle and extended valuation paradigm does invite increasingly selective portfolio construction.  Since the Global Financial Crisis (and with bravado since the Covid pandemic) investors have become conditioned to treat geopolitical shocks as buying opportunities, inflation surprises as temporary, and higher interest rates as self-correcting.  That framework was constructed in an era in which globalization reduced (economic) costs (though social costs were arguably quite high), central banks held long-term interest rates low, and fiscal deficits rarely constrained monetary policy.  Those assumptions are being challenged.  Today, energy security influences inflation, inflation limits central banks, sovereign borrowing influences long rates, and with them, the valuation of nearly all financial assets.

If investors subscribe to this conclusion, the practical implication is to become increasingly aware of portfolio duration exposures.  Duration resides within credit and equity structures dependent upon perpetual refinancing, assets valued against extraordinarily low discount rates or capitalized in an era of inexpensive capital, and growth franchises whose valuations remain sensitive to movements in real yields.  Many portfolios that appear diversified across asset classes are, in fact, highly concentrated in a single assumption – that long-term interest rates will revert toward the secular lows evidenced in the wake of macro events of the last fifteen years.  But, if the investment landscape is instead left to contend with higher financing costs, greater term-premium, and inflation volatility, portfolio concentration (or diversification by label) may prove far less effective than diversification by macro exposure.

At the same time, investors should resist the temptation to abandon technological innovation merely because comparisons to previous speculative episodes have become fashionable. While Artificial Intelligence shows characteristics similar to prior investment booms, i.e., enormous capital expenditures, optimistic projections, and rapidly expanding valuations, unlike many historical bubbles, A.I. is simultaneously creating real demand for physical infrastructure.  The distinction matters. Investors should increasingly differentiate between speculative beneficiaries of A.I. enthusiasm and businesses controlling the physical bottlenecks that make A.I. deployment possible.

Likewise, the fragmentation of post-WWII geopolitical coalitions and the emergence of new geographic and economic alliances argue for greater emphasis on companies possessing control of network franchises: raw material and intermediate good supply chain resilience, distribution and pricing power, financing and strong free-cash-flow rather than those dependent upon the frictionless perpetuation of globalization.  In short, we see portfolio construction built around resilience, not because recession is imminent (nor as inevitable as it may be), but because uncertainty has become a persistent investment factor rather than a temporary market condition.

If the defining investment question over the past four decades was how to allocate capital within an increasingly globalized, financially integrated and disinflationary world, looking ahead, the defining question of the next several decades may instead become how to allocate capital through the replacement of the system itself.  We believe investors should begin to consider positions less focused on cyclically opportunistic returns and more in terms of exposure to the architecture of emerging geopolitical, economic, and social operating convention.  The dominant themes are likely to be less about timing the next Fed decision and more about understanding where the physical, financial, and political foundations of the system overlap.  The Alternative asset bridge in our Global Macro Allocation portfolios together with the “Industrial Power Renaissance” and “De-Globalization” themes in our SAMT ETF are examples of the increasingly interconnected relationship between infrastructure, energy security and strategic mineral access, and logistics networks.

Equally important is recognizing that the monetary system itself may be entering a period of volatility.  For most of modern history, national currencies served simultaneously as units of account, stores of value, a settlement mechanism, collateral, and as reserve assets.  Emerging technologies, increasingly cumbersome sovereign debt service, and the weaponization of reserves has put the Eurodollar system under intense pressure.  This is not to suggest the demise of the Dollar’s reserve currency status is imminent.  Rather, it suggests that investors should increasingly own assets that would benefit from any number of a variety of outcomes, e.g., gold and selected commodity exposure, ownership of businesses controlling irreplaceable and productive real assets or scarce infrastructure providing optionality against structural monetary change.

Perhaps the most profound implication, however, concerns the nature of equity leadership.  Throughout financial history, the world’s greatest compounding businesses have generally emerged from the dominant economic power of the era: Amsterdam during Dutch commercial supremacy; London during Britain’s industrial ascent; New York throughout the American century.  If the physical architecture of the global economy is gradually shifting toward an increasingly multi-polar world characterized, in part, by Asian manufacturing leadership, A.I.-enabled industrial production, regionalized supply chains, and tokenized financial infrastructure, then equity leadership may increasingly reflect those centers of economic gravity.  Investors need not predict precisely when such transitions occur to benefit from them, but it may be wise to recognize that structural transformations unfold gradually beneath the surface before appearing suddenly on the leaderboard.  The objective, then, is not to forecast every macro event correctly, but to construct portfolios sufficiently diversified across emerging sources of wealth creation.

Nicholas Bohnsack