AI will change the core logic of investment, will the 60/40 stock and bond strategy become obsolete?

Morgan Stanley points out that the rise of artificial intelligence has the potential to change some investors’ core investment principles: 60/40 investment portfolio

This investing strategy — allocating 60% of a portfolio to stocks and 40% to bonds — has been touted as the foundation of investing since the 1950s, but over the past few years it has come under scrutiny. There are more and more doubts. Now, another driver of the debate is growing: artificial intelligence.

That’s because the technology could boost productivity so much that the correlations between economic growth and inflation, and between stocks and bonds, could reverse.

Morgan Stanley analysts wrote: "Technological diffusion acts like a supply shock, boosting growth in the short term and often lowering inflation at the same time."

As a result, previous assumptions about how to diversify risk may no longer apply, as the AI ​​boom will deliver healthy returns for both stocks and bonds - breaking the traditional negative correlation between the two.

This undermines a key part of the 60/40 strategy. "In other words, bonds - as has been the case this year - will no longer be the good diversifiers they have been for the past 30 years," the analysts wrote.

Analysts at Morgan Stanley further explained that the traditional negative correlation between stocks and bonds has been reversed, a situation that also occurred during the Internet bubble in the 1990s. The explosive growth of information and communication technology has accelerated capital investment, reduced operating costs for enterprises, and increased wealth, leading to higher consumption levels

“Similar to information and communication technologies, artificial intelligence, especially generative artificial intelligence, has the potential to broadly improve productivity across industries.”

After the recent "U.S. debt crisis", the debate about the 60/40 portfolio has become increasingly fierce. This comes after the Federal Reserve sharply raised interest rates to curb rising inflation. Therefore, the 60/40 portfolio did not achieve amazing returns

BlackRock said that in the new era of high interest rates, the 60/40 investment portfolio is no longer applicable and investors now need to be more "flexible" and "meticulous." At the same time, Vanguard Group expects the strategy to bring high returns next year

Morgan Stanley said that the impact of generative artificial intelligence is only one of many factors that may affect asset correlation and has a certain impact on economic growth and inflation

The strategists said, "But if we do see this happen, we think it could mean that long-term portfolios will tilt more towards stocks than bonds, as fixed income becomes a less reliable diversifier. Investment tools. We think investors may be looking for new portfolio diversification tools,"

We may also see a further acceleration in asset allocators investing money into private credit. In theory, private credit is less correlated with listed equities and fixed income. They added

Source: Financial Associated Press

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