Stock-Bond Correlation : A Global Perspective

Stock-bond correlation is considered an important input for multi-asset portfolio construction. While there has been much research on US stockbond correlation, less work has focused on stock-bond correlations in other countries, their relationship to each other, and their common macroeconomic drivers (if any).For the last 20 years, Developed Market (DM) local stock-bond correlations have, by and large, been negative, matching the US experience. Negative stock-bond correlation provides an implicit hedge of one asset to the other, dampening overall portfolio risk. A shift in local stock-bond correlation regime from negative to positive would alter the expected risk-reward characteristics of a portfolio of local assets.Changes in local stock-bond correlations will likely be driven by economic and policy settings both in the US and in the local market. A shift to positive stock-bond correlation would likely manifest itself widely across DMs, making it difficult to find low-risk, fixed income assets with equity hedging properties.CIOs and asset allocators need to monitor both US and local macroeconomic and policy developments when assessing the likelihood of a stock-bond correlation regime change