Private markets, encompassing assets such as private equity, private credit, infrastructure and real assets, offer an additional way to diversify. By complementing traditional holdings with exposure to private markets, investors can access new sources of return and enhance their portfolios’ ability to navigate changing economic conditions.
What if the diversification investors have relied on for four decades no longer works the same way?
For decades, portfolio construction followed Modern Portfolio Theory (MPT), introduced by Harry Markowitz in 1952. MPT showed that combining imperfectly correlated assets could optimise risk and return. This shaped the classic equity-bond mix that investors relied on throughout the late twentieth century.
Traditionally, equities and bonds offer natural diversification as they often move in opposite directions: when equities fall, bonds typically provide stability. The year 2022 challenged that relationship, with both asset classes selling off sharply, shaking confidence in ‘buy-and-hold’ approaches. Market developments in 2025 added to this pressure, calling into question several long-held assumptions at the heart of traditional portfolio construction.
A market regime defined by major shifts in global economies and geopolitics now prevails, marked by more frequent inflation shocks, changing relationships between major asset classes, and concentrated returns in key markets. Investors seek additional tools to manage risk and access new sources of performance. Enhanced diversification through assets historically considered ‘alternative’ provides one strategy to complement traditional portfolios.
“Higher-for-longer rates, persistently elevated inflation and a fundamentally shifting global economic landscape at a time of technological advances which open new avenues to growth, inspire the emergence of more modern thinking in portfolio construction,” says Jonel Matthee-Ferreira, CEO of discretionary fund manager Cogence. “The diversification principles at the heart of MPT hold firm. However, this same logic of spreading risk while gaining exposure to a broad set of opportunities makes a compelling case for investors to look beyond traditional asset classes and strategies, in our view.”
What made 2022 different: A black swan or structural market change?
In 2022, supply bottlenecks caused by the global COVID-19 pandemic met a new era of geopolitical uncertainty as Russia invaded Ukraine. The resulting surge in inflation ended nearly 40 years of steadily falling interest rates.[1] Central banks responded with the fastest rate-hiking cycle since the 1980s. Consequently, equities and bonds declined in tandem with the typical balanced portfolio in the US shedding more than 15% in value.[2]
Recognising that 2022 was an unusual year remains important. Economies were still adjusting to unprecedented monetary stimulus following the global financial crisis and the pandemic. Analysis of more than 200 years of historical data suggests that the probability of equities and bonds both declining together in any given year remains well below one in ten.[3]
By 2025, returns for traditional balanced portfolios recovered into positive territory. Over multidecade horizons, simple equity-bond mixes continued to deliver robust annualised returns, even when including the losses of 2022.[4]
If 2022 represented a true black swan – a rare and unpredictable event with major impact – can it stand as the exception that debunks the rule?
Despite being a market oddity, the year should not be viewed merely as a once-off anomaly. It highlighted how structural changes can interact to undermine long-standing diversification principles. Of greater relevance for today, 2022 also marked the beginning of a fundamentally different global market environment, motivating more modern thinking in portfolio construction.
Why equity‑bond correlations are turning positive after 40 years
One of the most important changes centres on the shift in equity-bond correlations.For most of the four decades from the mid-1980s to the late 2010s, correlation between monthly returns on global equities and government bonds remained negative. When stocks fell, bonds usually rose, and vice versa.
This negative correlation proved central to the case for the traditional equity-bond portfolio as a diversification solution. Since around 2021, however, this relationship appears to have flipped. According to the Bank for International Settlements, equity-bond correlations turned positive in the US and Europe.[5]
BlackRock believes this dynamic may persist: “Unlike previous episodes of temporary correlation spikes, we believe today’s alignment between equities and bonds reflects deeper structural forces: persistent inflation dynamics, policy action and fiscal imbalances.” The world’s largest asset manager adds: “The foundational relationships that once anchored traditional portfolio construction have shifted, making many portfolios riskier overall.” [6]
A downturn may still lead to rate cuts, which have historically helped bonds act as a cushion. But with inflation pressures and policy uncertainty reshaping central-bank behaviour, investors can no longer rely on this relationship with the same confidence as in previous decades. BlackRock notes that in the previous regime, US dollar exposure often helped diversify equity risk.
In 2025, the relationship shifted, with the dollar sometimes falling alongside equities. As long as this trend persists, they argue that investors should not rely on USD exposure alone as a hedge and may need to look to other diversifiers such as international equities or alternatives.[7]
“US Treasuries are not performing the same diversification role they did in the past,” states Matthee-Ferreira. “The uncertainty, volatility and valuations witnessed in 2025 would, historically, have driven a strong flight into safe assets such as government bonds and the USD. This time, flows have been more muted, with investors also seeking safety in assets like gold. In this environment, investors need to broaden their toolkit.”
What drove market concentration in 2025?
BlackRock, in their investment directions, considers that a second structural trend of the new regime involves the narrowness of the market, where only a handful of companies are driving the majority of the stock market’s performance. Market concentration, driven by superior growth from a small set of tech and AI leaders, elevating valuations of broad US indices, is a trend not expected to reverse in the near term, observes BlackRock.
However, at the same time, the investible universe on public markets is contracting. The median time a unicorn – a privately held company valued at over USD 1 billion – stays private has increased to 10.7 years, up from 6.9 years in 2014.[8]
Private firms now account for almost 90% of companies above USD 100 million worldwide.
“For investors seeking exposure to businesses at the centre of global transformation, from AI to infrastructure and energy transition, public markets alone are no longer sufficient,” says Matthee-Ferreira. “We believe investors can benefit by looking beyond listed markets to capture a fuller set of opportunities as a complement to their traditional portfolio.”
How can private markets enhance portfolio diversification?
Private markets represent one such extension. This broad asset class spans private equity, private credit, infrastructure, and real assets. It has grown rapidly, with global assets under management projected to exceed USD 19.6 trillion by 2029.[9]
Across EMEA, the average allocation to private markets is expected to rise from 0–5% today to 5–20% by 2030.[10]
This shift reflects a structural move toward broader sources of return beyond traditional public markets, not a replacement of listed equities and bonds.
According to BlackRock: “Increasing correlations between equities and bonds, and greater concentration in major benchmarks, mean that investors need to look beyond public markets more than ever. On the other hand, low correlations between private and public assets can help investors in today’s era of increased volatility and uncertainty.” [11]
Return drivers in private markets are, by design, less exposed to daily market sentiment. They link more closely to company-level cash flows, valuations at entry and exit, and the ability of managers to add operational value. This can create lower measured correlations and an additional source of diversification within a broader portfolio.
For Cogence, these characteristics make private markets an important component of modern portfolio thinking.
“Private markets are not a replacement for traditional bond-and-equity portfolios,” Matthee-Ferreira emphasises. “They are an enhancement. When used thoughtfully alongside listed assets, they can provide investors with more robust diversification and access to return streams that are structurally under-represented in public markets.”
Visit cogence.co.za for more information.
Footnotes
- Rogoff, K. S. et al. (2023). Long-Run Trends in Long-Maturity Real Rates, 1311- 2022. American Economic Review, 114(8), 2271–2307.
- https://www.morningstar.com/economy/6040-portfolio-150-year-markets-stress-test
- article_bigpicturereturnofthe6040_A4.pdf
- https://www.nl.vanguard/professional/insights/market-commentary/the-global-60-40-portfolio-steady-as-she-goes
- https://www.bis.org/publ/qtrpdf/r_qt2312v.htm
- https://www.blackrock.com/us/financial-professionals/insights/investment-directions-fall-2025
- Autumn 2025 Investment Directions EMEA, p. 4
- Preqin data, BlackRock, September 2025
- https://preqin.com/about/press-release/global-alternatives-markets-on-course-to-exceed-usd30tn-by-2030-preqin-forecasts?original_referrer=
- https://alternativecreditinvestor.com/2025/04/29/blackrock-emea-wealth-investors-to-ramp-up-private-markets-allocations/
- Autumn 2025 Investment Directions EMEA, p. 6
Cogence (Pty) Ltd – Registration 2009/011658/07. An authorised financial services provider (FSP No 52242). BlackRock® is a registered trademark of BlackRock, Inc. and its affiliates (“BlackRock”) and is used under license. BlackRock makes no representations or warranties regarding the advisability of investing in any product or the use of any service offered by Cogence (Pty) Ltd. BlackRock has no obligation or liability in connection with the operation, marketing, trading or sale of any product or service offered by Cogence (Pty) Ltd. Links to all disclaimers can be found on www.cogence.co.za.
