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Rethink, relearn, respond: portfolio stability in an unstable world
key takeaways.
In a time of geopolitical, economic and social upheaval, uncertainty is at record highs – yet credit spreads are incredibly tight and equity prices are soaring
Investing in times of uncertainty requires focussing on intrinsic yield and seeking positive convexity across asset classes to capture tactical opportunities
By focussing on system changes, equity investors can look through the current disruption to understand the structural trends transforming the economy.
In the prescient 1970 book Future Shock, Alvin Toffler predicted a world in which the accelerating pace of change meant the key skill needed to thrive would be the ability to adapt to constant change. “The illiterate of the 21st century,” he predicted, “will not be those who cannot read or write, but those who cannot learn, unlearn and relearn.”
We live in times of unprecedented change
Halfway through the third decade of the 21st century, we are indeed in a time of turmoil, experiencing geopolitical and economic shifts, technological and social disruption:
Accelerating deglobalisation.America-first policies and US tariffs echoing those of a century ago are driving a post-globalisation economic era
Rising geopolitical strife. War in Ukraine and the Middle East, along with the China-US rivalry reflected in growing tensions over Taiwan, threatens global stability
Western woes. Fiscal stress, populism, political division, growing inequality and high living costs are destabilising many Western democracies
Sky-high AI. Artificial intelligence is an investment theme and force of innovation, but rapid progress without careful integration risks major economic and social disruption.
Meanwhile, the global climate warms and humanity’s footprint on nature broadens. Across all dimensions, change is unrelenting and rapid.
Watch our manifesto video: rethink stability
Uncertainty is almost off the charts
Gauged by references in specialised country analyses by the Economist Intelligence Unit, uncertainty is higher than at any point since the end of the Cold War across political, economic and social spheres (see Figure 1).
FIG 1. Global uncertainty is at a three-decade high1
In the US, tried and tested economic metrics that have been largely consistent for decades offer conflicting views – at once indicating risks to growth and cruising speed (see Figure 2).2 While the National Bureau of Economic Research sees the US economy as still expanding, just 20% of economic indicators point to growth.3 Survey indicators are generally negative by one standard deviation; composite indicators are close to their long-term averages; while productive capacities and cargo loading are marginally negative.
FIG 2. Established US economic indicators are diverging4
The lack of obvious impact from tariffs is puzzling analysts, with long-trusted signals seemingly losing their ability to predict the trajectory of the world’s leading economy. Some recent data suggest a deterioration in economic conditions: US producer price inflation (PPI) increased in July, while dramatic falls in non-farm payrolls since May provoked a Federal Reserve rate cut in September, with markets expecting two more by the end of the year. Yet US and eurozone manufacturing Purchasing Managers’ Indices (PMIs) show ongoing expansion – while services PMIs indicate growth in the US, Europe and Japan.
Despite the backdrop of severe macro uncertainty, investors’ animal spirits remain strong, with our risk appetite indicator firmly in bullish territory. Given investors are clearly keen to put their money to work, the question becomes: how can they best play this environment? Below we offer perspectives from our Multi Asset, Alternatives and Sustainable Equities teams.
To understand the changing environment, it is essential to differentiate between risk and uncertainty. The former can be more easily hedged as it relates to a specific market direction, whereas the latter implies an indeterminate market direction and requires a different investment response.
Risk: a ‘known unknown’
Risk involves situations where probable outcomes are likely to fall within a known range and occurrence probabilities can be assigned to them. By modelling risk5, it is possible to further enhance or diversify exposures. For example, our Multi Asset team measures periods of expanding growth, deteriorating growth and inflation – and the associated effects on volatility and valuations – to guide the long-term risk allocation of its All Roads range of portfolios.
In contrast to risk, uncertainty involves scenarios where outcomes are unknown, making it impossible to assign odds
Uncertainty: a world of ‘unknown unknowns’
In contrast to risk, uncertainty involves scenarios where outcomes are unknown, making it impossible to assign odds. A recent example was the launch of President Trump’s tariff policy. Even though his intention to raise trade levies was heavily flagged, the lack of clarity concerning the timing, scale and variability of tariffs – combined with the range of possible reactions from multiple interested parties – made it extremely difficult to assess their likely impact on rate fluctuations, company earnings and creditworthiness.
In periods of uncertainty, the future trajectories of asset prices become inherently ambiguous. Our Multi Asset team finds that carry strategies tend to lead in uncertain environments by capitalising on the absence of clear price trends and focussing on market yields. While maintaining broad diversification, embedding an exposure to these strategies is not just a tactical move but necessary for portfolio resilience when uncertainty grips markets.
FIG 3. In times of uncertainty, carry strategies offer a way forward6
Modelling uncertainty calls for flexibility and adaptability
Six months after Liberation Day, the real impact of new trade levies on the US economy remains unknown, especially since many firms have used the various delay periods to build up inventories rather than relying on new materials and stock. Yet markets are adapting to capricious White House statements, and sometimes looking through them – as illustrated by the popularity of the TACO trade (Trump always chickens out).
Today, equities are up, credit spreads tight, volatility low and a buy-the-dip mentality persists. But a deterioration in hard data or climbing long-term yields could quickly challenge the current rally. Our Multi Asset portfolios therefore remain broadly diversified, moderately overweighting defensive assets over cyclical, with our biggest exposures – duration, followed by credit – providing carry.
Across market cycles, strategies focussed on convexity can access a range of opportunities to help portfolios adapt
Alternatives: seeking convexity
Across market cycles, strategies focussed on convexity – greater upside potential while limiting downside – can access a range of opportunities to help portfolios adapt.
For example, when positive macro conditions encourage corporate dealmaking, capital-structure and merger-arbitrage trades can benefit from shifting asset valuations. In contrast, when deteriorating economic conditions mute corporate activity, net shorts, relative-value and merger-arbitrage shorts are among the effective strategies.
And when macro conditions are improving but corporate activity remains weak, distressed debt or equity and compression trades offer opportunity. Investing across the capital structure, the Event Driven team in our 1798 Alternatives business targets trades offering convexity at all stages of the cycle, supporting investors’ efforts to respond to changes in the environment.
As credit spreads tighten, repricing risk heightens
Currently, technicals in credit markets are strong, with demand for long-term debt from pension funds and insurers high, investors focussing on all-in yields and new issuance limited. As a result, despite some signs of US economic deterioration, spreads remain extremely tight.
In a recent Bank of America survey, 84% of credit investors viewed investment grade (IG) spreads as extremely overvalued, while 76% said the same for high yield (HY).7 Given today’s mix of high macro uncertainty and bullish risk appetite, hedging long credit exposure against the risk of a sharp repricing could prove to be prudent, in our view.
Capitalising on potential spread widening
Several potential catalysts could end this period of tight spreads, according to our 1798 Credit Convexity team, and are therefore clear risks to investors with long credit positioning:
High tariffs: the real impact of trade levies on US consumer behaviour and spending
Economic slowdown: clear signs of a structural reduction in economic activity, beyond short-term volatility
Mean reversion: the tendency for asset valuations to return to long-term averages or fair value
Normalisation: a sustained trend towards the repricing of cash bonds, rather than reacting to episodes of technical volatility.
As a result of these catalysts, we see opportunities to hedge against richly priced credit markets and therefore embed a source of convexity in portfolios. These strategies range from relative-value credit, long/short approaches involving debt and equity or structured credit, and trades designed to benefit from increased volatility.
Sustainable Equities: positioning for system changes
Today’s disruptions – while significant – risk blinding us to the structural changes reshaping the global economy.
Throughout history, new economic models have emerged to outcompete existing systems. Consider the mechanisation of agriculture and transport over animal-based methods during the Industrial Revolution, or the rise of information technology in the past 100 years. In each of these system changes, unavoidable challenges or ‘pain points’ provoked an irreversible transformation of technologies, value chains and economic dynamics. These typically involve accelerated innovation, sectoral collisions and the emergence of new players and investment models.
Applied in today’s volatile macro environment, system change analysis provides a way of grounding our views on emerging economic models that will shape markets in the long term
The pain points acting as catalysts for today’s system changes
Past system changes occurred separately in isolated systems over a long period of time. Today, in contrast, the convergence of multiple factors is creating a series of pain points that are driving change in all sectors of the economy, all at once:
Climate change. The escalating impact of global warming is creating momentum for decarbonisation and increased electrification in pursuit of net zero
Environmental concerns. The breaching of planetary boundaries is driving a more nature-positive approach focussed on resource efficiency and sustainability
Social issues. Unequal access to health, financial and other services encourages socially constructive approaches focussed on wellbeing, affordability and accessibility
Digitisation. A growing digital divide is prompting a search for innovative solutions and improved data productivity to create a fully digitally-enabled society.
Systems change analysis as an anchor for investment decisions
Applied in today’s volatile macro environment, systems change analysis provides a way of grounding our views on emerging economic models that will shape markets in the long term. As new systems outcompete old ones, the rapid shifts taking place create new investable opportunities at speed and scale.
Harnessing this approach, our Sustainable Equities team aims to look beyond obvious trends, asking instead where economic and logical responses to pain points are creating new opportunities and sustainable outcomes that are rooted in economic fundamentals. Policy weakness towards climate action and nature restoration – from the Trump Administration, in particular – may delay the changes underway but leaves root challenges unaddressed. This only strengthens the need for new models and appetite for adoption.
Stock picking based on a series of new paradigms
Looking through today’s noise, we see four system changes whose end states are fundamental to the transition to a sustainable economy. Running through each of them, technology, data and AI act as the digital spine of the transition.
Energy systems focussed on electrification, decentralisation, flexibility and ‘smartification’
Industrial systems hardwired for energy and resource (and hence economic) efficiency
Consumer systems characterised by high product innovation, accessibility and affordability
Healthcare systems built around wellbeing, preventative and value-based care.
FIG 4. System changes are creating a sustainable end state for the global economy8
A differentiated lens for equity investing
Irrespective of the macro or market conditions, systems change investing enables the creation of broad, diversified strategies across the global equity universe, as well as focussed products targeting specific elements of the transition.
By defining core transition assumptions clearly and assessing their implications across the economy, we seek mispriced companies whose opportunities outweigh threats, enabling them to generate strong earnings and resilient multiples.
Active investment for portfolio stability
At Lombard Odier, we have navigated over 40 financial crises and a range of economic transformations in our 229-year history. In the process, we have learned that markets are not defined by short-term disruptions, but are shaped by the rise of new economic systems that emerge to outcompete existing ones. At the same time, we have developed expertise across asset classes and traditional, alternative and private-market investment approaches in order to seek opportunities in every environment – investing actively for the stability of clients’ returns.
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Preference Centre
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1 Home - World Uncertainty Index. Gauged by references to uncertainty, policy uncertainty and trade uncertainty in country analyses by the Economist Intelligence Unit. Accessed October 2025.
2 We look at a range of indicators: ‘surveys’ (Philadelphia Fed, Richmond Fed, US ISM Composite (manufacturing and services); ‘economic activity’ (Aruoba-Diebold-Scotti and GDPNow); the Sahm rule (transforms the unemployment rate into a recession timing indicator); the capacity utilisation rate; and the Kilian and Zhou indicator (measures economic activity based on maritime freight).
3 National Bureau of Economic Research, LOIM nowcasters.
4 LOIM, Bloomberg. Note : indicators are z-scored. For illustrative purposes only.
5 Common risk measures and models include value at risk (VaR), conditional VaR, liquidity risk, credit risk, stress testing, and scenario analysis.
6 LOIM, Bloomberg. Carry and trend strategies are represented by blends of Goldman Sachs Asset Management indices. Past performance is not a guarantee of future results. For illustrative purposes only.
7 Bank of America proprietary research. Accessed September 2025.
8 LOIM. For illustrative purposes only.
important information.
For professional investors use only
This document is a Corporate Communication for Professional Investors only and is not a marketing communication related to a fund, an investment product or investment services in your country. This document is not intended to provide investment, tax, accounting, professional or legal advice.
