Part 1: Surviving the current market storm, with Royal London’s Trevor Greetham

In a recent episode of our IFA Talk podcast, we welcomed Trevor Greetham, Head of Multi-Asset at Royal London Asset Management, into the studio. Together, we discussed how advisers should approach long-term investment strategies during periods of heightened market volatility, such as we’re seeing right now.

The conversation explored the importance of diversification at a time when traditional asset relationships have been tested, the potential role of alternatives such as property and commodities, and the growing risk of “spikeflation” driven by energy markets and geopolitics.

Today, we have brought you the first half of one of our most interesting and widely downloaded discussions to date on IFA Talk. Check in again tomorrow to get the second half of the story and what Trevor thinks about the geo-political situation in the Gulf!

IFAM: Diversification has been tested in recent years, but how important do you believe it is to have a broad diversification strategy? And also, what role can assets like property and commodities play to make portfolios a bit more resilient?

TG: It’s a really great question. Diversification, from my point of view, is not just limited to stocks and bonds. We like to say there’s no such thing as passive in multi-asset because you’ve got a whole range of different possible asset classes you can include, and some of them you can’t even access on a passive basis. For example, commercial property is bricks and mortar, so you’ve got to be doing development work, you’ve got to be a landlord collecting rents from tenants. There are all sorts of active management elements to some asset classes.

What we’re looking for are asset classes that can either generate a good long-term return to act as a source of stability or hedge against unexpected risks. For us, property is a great alternative long-term growth driver to equities. We’ve seen remarkably similar long-run returns since the 1980s, but property is much more based on what’s going on in the UK economy. In the dot-com crash of the early 2000s, stock markets fell about 50% over the three years, but property just kept going up.

You get that bit of diversification with property, and then with commodities. Royal London is one of the largest commodity investors in the UK, if not the largest. We’ve included commodities over the last 10 years because, as an asset class, they give you a real-time hedge against inflation shocks. Stocks and bonds can both suffer when inflation suddenly hits, so if you’re just in a balanced fund with stocks and bonds, we think you’re not sufficiently diversified.

IFAM: We’re hearing more about the risk of ‘spikeflation’, the sudden bursts of inflation driven by shocks like energy prices or geopolitics. How real is that risk over the next few years? And what does it mean for advisers reviewing asset allocation for clients?

TG: This is more of a structural backdrop. When the pandemic happened, and we were in that sudden stop of lockdown, wartime levels of fiscal and monetary stimulus were thrown at the world economy.

Then the reopenings happened, and all that stimulus was left in place. Inflation was already building up. It was too much money chasing too few goods. Then we got the invasion of Ukraine, and central banks ended up saying inflation isn’t transitory after all, and you’ve got this massive increase in the cost of living.

It resulted in a year of stagflation in 2022 when all of the chickens came home to roost, and stock markets were down, US stocks are down about 20% in dollar terms, and bonds have crashed. Commodities, meanwhile, had their second back-to-back year of 30% returns.

High inflation has not typically come through high, predictable inflation. It’s come through spikes in inflation. If you look back over the last 100 years, periods of high inflation like the 1970s and around the two World Wars were driven by sudden shocks which raised the overall price level. Inflation got up to 10, 15 or 20%, but once that new price level had been absorbed, inflation dropped back down to 0, 1 or 2%, until another shock came along.

The structural change that makes us think the world economy is more prone to those since the pandemic is, first of all, the degree of stimulus thrown at the world in the pandemic. Second is the tightness of commodity supply. There’s not much spare capacity in commodities right now, and as we transition to net zero, we’re not building as much spare capacity as we had in the past. I think that’s a good thing, but it does mean you’re more vulnerable to sudden rises in commodity prices.

We’ve also got high levels of debt, public and private debt, and when you’ve got high levels of government debt, it’s tempting for a government to resort to inflation. And then geopolitics. I mentioned the Ukraine invasion. Now we’ve got the Iran war. It feels like a much more unstable geopolitical world than we’ve had in the past, and that itself can create these inflation spikes.

Central banks won’t really help you. We’ve got a 2% inflation target in this country, but since 2020, we’ve had something like 30% inflation, and it’s only been six years. When these spikes happen, central banks say inflation is terrible, but they don’t raise interest rates enough to create a recession and squeeze inflation back out. They just let bygones be bygones.

That’s what’s likely to happen again in the current scenario in Iran. If oil prices stay high, central banks will wring their hands, but they’ll let inflation rise. Customers who care about the cost of living now and in their retirement need something in their portfolios that can hedge against these inflation spikes. In our view, that’s primarily commodities.

IFAM: You’re well known for your work on the Investment Clock and linking economic cycles to asset allocation. In today’s uncertain environment, how useful is that framework, and what does it mean for the importance of active asset allocation?

TG: I first started writing about the investment clock in the late 1990s. It’s a way of thinking about the global business cycle with different asset classes doing well at different stages.

The first reference I can find was from the 1930s in the London Evening Standard, asking if it was the right time on the investment clock to buy a house in London. They drew a circle, and around it they wrote stocks, government bonds and housing.

What we brought to this idea was that you can tell the time on the investment clock by analysing global growth and global inflation. Taken together, they’ll tell you where you are.

You’ve got a first stage of the cycle, which is a disinflationary weak economy. Central banks will be cutting interest rates, and government bonds will do well. Then you get the disinflationary recovery, which is what the clock looked like at the start of 2026, going into the Iran conflict. Growth was picking up, inflation had been falling, and central banks had been cutting interest rates.

When inflation then rises, those cuts become rate hikes. That’s what markets are currently pricing in. When you’re in that overheated phase and interest rates are going up, it means bond markets are suffering, and stock markets can suffer, although usually they keep doing well because the world economy is strong.

If you add rising inflation and slowing growth, then you get stagflation, as we saw in 2022 and in the 1970s. That’s when commodities typically do well, while stocks and bonds both sell off. In the last two weeks, we’ve seen exactly that. Oil is up about 25% while stocks and bonds are starting to sell off.

It’s a useful framework for understanding one of the influences on asset allocation, which is the global business cycle. It’s not the only thing we look at. The clock itself looks at economic data up to today, not next week, and sometimes the data comes with a lag.

At the moment, the investment clock is more useful in judging where we might be heading. If this is a short-lived inflation spike and oil prices fall, stock markets could recover, and we could continue the disinflationary recovery. If, instead, this becomes a prolonged period of conflict and high energy prices, then we could see something closer to stagflation.

Also, there’s an element of judgment in portfolio decisions. We’ve de-risked equities and added a bit more to commodities, and now we have to see what happens. The clock is still useful as a way of thinking, but ultimately, the data is the data, and we don’t want to drift too far away from the evidence.

Markets on edge? Why diversification is your first line of defence.
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