The Growth / Inflation ("GI") or Economic Cycle matrix for asset allocation decisions has existed in varying forms since the 1970's and has been popularized by work done by Ray Dalio and the Bridgewater team as well as the performance of the Bridgewater All Seasons Fund. This model looks at asset allocation between equities, bonds and commodities depending on the quadrant of the Growth and Inflation matrix as shown below.
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There are many ways to use this framework in your investing. It can simply be used to time your exposure to equities, it can assist in creating a diversified portfolio through direct investments in each asset class, or by ETF proxies or it can be used to tilt your portfolio for greater alpha generation by increasing and reducing asset class exposures at different points of the cycle.
Above, Andy West, HedgQuarters CIO, has overlayed this matrix with a view of where we have been in the Growth / Inflation quadrants, his assessment of where we are today and scenarios of where markets may shift from here and over what timeframe.
This matrix will be updated as data evolves to tell us more and we'll keep you informed of any changes to this assessment through member communications.
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As always this is Andy West's personal view and an indicator of how he is positioning his own investments. This is not financial advice nor a recommendation. Any forward looking views or statements are subject to material risk and uncertainty and can be changed without notice. Views on what assets work under different situations are indicative only with past performance no guarantee of future performance. The performance of financial markets depend on many factors that are not incorporated in a two factor (Growth / Inflation) model and we remind members that this can mean outcomes differ from what has been experienced in the past or is indicated in this framework. For that we provide asset class indicators linked above, and proxy portfolio performance charts to help assess where we are in this matrix and whether asset classes are performing to the expected outcomes.
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This assists you in making your own decisions on asset allocation in your portfolio.
Conventional Equity Sector rotation models overlay equity sectors on the market and business cycle. You may have seen diagrams like this circulated online which are backed by detailed work over many decades right across sell side strategists and buy side firms (like Fidelity as example of known work).
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At HedgQuarters we prefer to extend the Growth / Inflation matrix application to equity sector allocation as well as it means that there is a single unified system of monitoring and decision making that is internally consistent in its asseessment of asset class allocations as well as sub-asset classes (eg equity sectors). Below Andy West has extended the Growth Inflation matrix to highlight typical equity sector performance in each quadrant.
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You can launch the HQ Sector Dashboard to assess whether sector performance is adhering to your understanding of where we are in the cycle. This can highlight opportunities for equity sector tilts in your portfolio as conditions shift.
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