Global Market Strategist
Global Market Strategist
In Brief
- Energy shocks and a positive stock-bond correlation have weakened traditional diversification, making balanced portfolios harder to protect.
- AI remains a constructive long-term force, with private equity offering broader access to technology-enabled growth.
- Infrastructure and transportation provide lower-correlation income and implicit inflation protection, and AI demand adds a structural growth dimension.
Diversification in public markets is becoming increasingly challenging, both within and across asset classes. Repeated energy shocks have heightened inflation uncertainty and volatility, while central banks are recalibrating their responses to these disruptions. Our current economic outlook suggests that a repeat of the experience seen in 2022 is unlikely; however, there are echoes of it through a sustained stretch of positive stock-bond correlation. This trend erodes the diversification benefits typically expected from balanced portfolios. Meanwhile, the ongoing boom in artificial intelligence (AI) remains a constructive long-term force, but it is also amplifying concentration risks in equity markets and beginning to spill over into credit markets, making it even harder to build well-diversified portfolios. In this environment, alternative investments provide a valuable complement for those seeking differentiated drivers and uncorrelated returns.
Private lanes, broader gains
Private equity has historically had a high weighting toward the technology sector, but recently this has been overtaken by public equity (Exhibit 1). However, this exposure is notably different from that of public equity markets. Rather than being heavily concentrated in a handful of mega-cap companies, private equity can access a wider universe of technology-enabled businesses, spanning digital services, data infrastructure, automation, software, and sector-specific AI applications. This wider opportunity set allows private equity managers to capture AI-driven growth across multiple layers of the value chain, not just among the most visible beneficiaries in listed markets.
More importantly, private equity is differentiated in how value is created. As companies remain private for longer, a larger share of their high-growth phase now occurs before going public, with the median age of companies going public now extending to 12 years, roughly double the level compared to 25 years ago, and have an average market value of USD 5billion.
By investing in high-potential, fast-growing companies during their private phase, private equity investments provide access to earlier stages of revenue growth and value creation, potentially delivering enhanced returns.
Stable flows, rising loads
Infrastructure and transportation offer another source of differentiated diversification, with the asset class historically displaying one of the lowest correlations to public equities (Infrastructure: 0.0, Transport: -0.1) and bonds (Infrastructure: -0.1, Transport: -0.2) (Exhibit 2). A key reason for this is that infrastructure investments are tied to essential services that remain in demand throughout the economic cycle. From power generation and transportation to communications and other utilities, these sectors are non-cyclical and less reliant on discretionary consumption or corporate spending.
Arguably, the most distinctive characteristic of infrastructure investments is the implicit inflation protection they provide. Thanks to regulatory frameworks and long-term agreements with built-in inflation adjustments, many infrastructure investments have revenues that rise in tandem with higher input costs. This enables infrastructure companies, such as gas and energy utilities, to pass on higher costs to customers, offering natural protection against inflation risks and delivering a unique return profile compared to broad equities and core government bonds.
Beyond its defensive qualities, infrastructure is well positioned to benefit from the ongoing AI upcycle. The exponential surge in AI workloads has driven demand for data centers, accelerating buildout and increasing the need for reliable power generation that far outpaces industry supply. Energy storage, grid capacity, and transmission also experience widespread shortages. As a result, infrastructure has evolved from being a stable cash-flow asset class to one that also gains from the AI-related expenditure cycle.
Investment implications
Alternatives are becoming an increasingly important complement to traditional public market allocations. By tapping into higher-growth segments from a broader universe of companies and at an earlier stage of value creation, private equity could help portfolios reduce reliance on the highly concentrated public equity market for growth. At the same time, infrastructure and transportation provide a differentiated and stable source of income that not only shows lower correlation to traditional markets but also offers an implicit hedge against inflation risks. These collectively fit into the three core pillars for Alternatives: Alpha, Income, and Diversification.
While alternatives do not fully replace the role of traditional equities and fixed income, today’s market environment is gradually more favorable for portfolios that diversify with alternatives. A thoughtful allocation to alternatives can maintain exposure to AI-led structural growth, broaden return drivers, and strengthen portfolio resilience in a more volatile market environment.
More insights are available in our Guide to Alternatives.