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Private debt caters to diverse investment

40 Years of Navigating Uncertainty: David Rubenstein's Private Markets Playbook

While the ‘wait and see’ approach continues, the factors at play are seemingly becoming ever more complex as the geopolitical environment continues on its unpredictable course. Below, we address what we know, what we don’t know, and - most importantly - what we 

The data in mid-March showed the US economy to be stable, with consumer spending strong

 despite continuing uncertainty in the labor market.

 At the same time, inflation appeared to be creeping upwards, with January’s Core PCE reading (the Federal Reserve’s preferred gauge) rising to 3.1%.

The Fed’s revised projections showed higher growth and inflation this year, as well as a higher neutral rate (3.1%).

 However, as Chairman Jerome Powell also noted in the press briefing, “I​​f [the Fed] were ever ​going to ​skip ⁠an SEP, this would be a ​good one, because ​we ⁠just don't know.”

Powell partly attributed the higher inflation reading to the ongoing tariff situation. However, the shadow of the conflict between the US and Iran, which began a few weeks prior on February 28th, also loomed large in the background.

 The meeting minutes recently released show that a growing number of committee members are trending hawkish as progress stalls, implying that a rate hike could be on the table before long.

In his press statement, Powell expressed the view that price shocks, which include both the effect of tariffs and oil supply constraints, are normally a temporary factor. He added that given that the US has seen above-target inflation for five years now, simply discounting them is inadvisable.

The impasse in which the Fed finds itself has been developing since last year. It consists of a combination of countervailing forces. A precarious labor market suggests that rates need to go down, while stubborn inflation makes the Fed wary of calling victory too early.

Data continues to emerge. The March employment figures (+178,000) appear to dramatically reverse the sudden drop in February (-133,000). However, the three-month average shows a more moderate increase of +68,333, which is comfortable enough to maintain employment stability.

Core PCE came in at 3.0% for February, lower than January but still a full percentage point above target.

 While the March headline CPI jumped from 2.4% to 3.3%, reflecting the spike in gas prices owing to the closure of the Straight of Hormuz, Core CPI showed a more modest increase of 2.5% to 2.6%.

While many - including Powell - hope the impact of tariffs and the disruption of the oil supply will be temporary, it remains to be seen how ‘temporary’ the Iranian conflict will be. The Fed’s own models show that sustained upward pressure on the oil price could add to inflation substantially.

Fed official Barkin pointed out in a recent speech that comparisons to the 1970s oil crisis are misjudged, given that the U.S. is now a net exporter of oil. However, inflation is as much a product of psychology as rational market forces.

Currently, the markets are pessimistic about the prospect of lower rates. While the Fed is still projecting one more cut this year, the market consensus for the next downward move is in mid-2027.

The current situation is an analytical nightmare. On the one hand, there is enough data to cherry-pick one’s way to any conclusion. On the other, there is enough instability to upend the most elaborate analyses in a matter of hours.

In such circumstances, it can be more helpful to narrow one’s focus. In the case of the Fed, the guiding light so far has been inflation. As long as Powell is at the tiller, it is likely this will remain the case.

But broadening one’s focus is also important as well. Wider issues such as the impact of AI on productivity and the long-term sustainability of U.S. national debt remain the most important shaping forces for the economy and one’s investment portfolio. Finding the signal is a process of tuning out the noise.

Fed Decision April 2026: At The Crossroads Again

This is not an isolated moment. It is a reminder that portfolio risk runs deeper than any single event. Vanguard recently raised a question that deserves more attention than it received.

 If the logic of concentrating in the best-performing market is sound, they asked, why stop at one country? Why not one sector? One stock?

The answer, of course, is that such an approach would be risky. And yet, many investors are closer to it than they might think. The top ten stocks in the S&P 500 now account for approximately 41% of the index, a level of concentration not seen since the peak of the dot-com bubble, and by some measures exceeding it. Between 1990 and 2015, that share hovered between 18% and 23%. It has nearly doubled in the space of a decade.

The consequences of this concentration are not abstract. In early 2025, when the S&P 500 fell nearly 15%, the top ten stocks drove the majority of the decline. When markets recovered from April onwards, the same group accounted for more than half of the rebound. The ‘index’, in other words, is increasingly a proxy for a handful of mega-cap technology firms, rather than a broadly representative cross-section of the economy.

For investors who hold a large portion of their wealth in a single country or region, this concentration is made worse. The result is a portfolio that looks diversified on paper but in practice moves in line with a narrow set of companies, sectors, and economic cycles.

This brings us to a phenomenon that is well documented in the academic literature but difficult to shake in practice: home bias. Studies of GCC investors, for example, have found that both professional and retail participants exhibit a strong preference for local and regional equities, often at the expense of global diversification. The intuitive response to buy locally has, for many, outweighed the clear benefits of casting a wider net.

This is understandable. Investors naturally gravitate towards what they know. Local markets feel familiar; the companies are recognizable; the currencies are pegged, removing one layer of perceived risk.

However, in a region where equity markets are heavily weighted towards financial institutions and energy, with financials alone accounting for over 57% of the MSCI GCC Countries Combined Index, this familiarity can translate into doubled concentration risk. An energy-sector professional whose personal income, business interests, and investment portfolio are all tied to the same economic drivers faces the prospect of a simultaneous decline across every dimension of their financial life.

2025 has provided a compelling illustration of why geographic diversification works. Through the first half of the year, non-US stocks outperformed their American counterparts by a considerable margin: approximately 12% for international equities, versus roughly 2% for US stocks. This represented one of the largest reversals of the prior decade’s trend, during which US markets led the world by a wide margin.

For those who had grown accustomed to US dominance, this came as a shock. For those who were geographically diversified, it was simply the portfolio working as designed.

The data over longer periods reinforce the point. Analysis by Trustnet, using LSEG and MSCI data, showed that a hypothetical portfolio diversified across multiple regions (the US, UK, Europe, Japan, and emerging markets) was never the top performer in any single year over the past decade. Equally, it never delivered the worst performance. Over a ten-year period, its annualized return surpassed every major region except the United States.

This is the essence of diversification. It is not a strategy for maximizing returns in any given year. It is a strategy for ensuring that no single year, and no single shock, can inflict outsized damage on a portfolio.

The reason geographic diversification works is that economic cycles across regions are not synchronized. When the GCC faces oil price sensitivity, the US may be in mid-expansion. When European markets contract, Asian manufacturing may be accelerating. As HSBC Asset Management noted in its mid-year outlook, the ‘macro anchors’ that once underpinned the global order (stable inflation, predictable growth, fiscal discipline, and confidence in US assets) can no longer be taken for granted.

Research by Bridgewater Associates identifies Japan, India, and Brazil as among the most diversifying markets for global investors, precisely because their conditions are driven by domestic factors rather than US monetary policy or global risk sentiment. Japan’s economy is one of the largest and most independent demand centers in the world. India’s growth is leveraged to a large and expanding domestic consumer base. Brazil’s commodity exports and robust internal economy give it a fundamentally different return profile.

GCC equities themselves have shown correlations of only 0.52 to 0.53 with both developed markets and broader emerging market benchmarks over the past two decades. This makes them a genuinely useful diversifier within a global portfolio. The critical distinction, however, is between using the GCC as one component of a broader allocation and treating it as the default.

Every market carries some form of concentration risk. In the US, it is the dominance of a handful of technology companies. In Europe, financials and industrials carry outsized weight. In the GCC, the concentration is in energy and financial services. None of these are inherently problematic; the risk emerges when an investor’s portfolio mirrors the concentration of their home market without a counterbalance elsewhere.

The GCC is, in fact, undergoing a structural transformation, with more than 170 IPOs raising over $50 billion since 2022, driven by regulatory reforms in Saudi Arabia and the UAE.

The goal of diversification, whether across sectors or geographies, is ultimately about wealth preservation: lowering the correlation between different types of risk so that no single event can jeopardize a portfolio’s long-term trajectory. This is not a case against any particular region. It is a case for ensuring that regional exposure, wherever it may be, is complemented by positions with genuinely different economic drivers.

It is one thing to accept the principle of diversification; it is another to implement it effectively. Ninety One, a global investment manager, forecasts that US equities will return approximately 3.6% per annum over the next decade, roughly on par with Europe, while the UK, Japan, and emerging markets are each expected to deliver upwards of 5% per year. If these projections prove even broadly accurate, the cost of over-allocating to any single region becomes clear.

BlackRock has argued that investing in assets with low correlation, whether due to geography, economic sector, or currency, reduces portfolio risk and diversifies sources of return. Regional and thematic exposure, driven by factors such as demographics and geopolitics, can be constructed with relative ease through modern investment vehicles.

However, geographic diversification alone is not sufficient. A portfolio diversified across geographies but concentrated entirely in public equities remains exposed to sentiment-driven volatility, correlation spikes during crises, and the structural limitations of a public market increasingly dominated by a few large companies. In a companion article, we will explore why the asset class dimension, and specifically the role of private markets, adds a critical further layer of resilience.

This is not a new idea. University endowments, most notably Yale and Harvard, have for decades pursued an approach that combines public equities with significant allocations to alternative investments, including private equity, private credit, real estate, and infrastructure. The rationale is straightforward: by accepting lower liquidity in exchange for exposure to fundamentally different return drivers, these institutions have historically achieved both higher returns and lower volatility than portfolios confined to public markets. Over the past 20 years, endowments with allocations of 30% or more to alternatives have consistently outperformed those without, with lower drawdowns during periods of crisis.

Importantly, alternative investments of institutional quality are typically sourced from developed markets with deep capital pools, strong legal frameworks, and high governance standards. This means that diversifying into alternatives naturally provides geographic exposure to economies and sectors that may be underrepresented in a regionally concentrated portfolio. It is, in effect, a way to address sector, geographic, and asset class concentration in a single step.

The strongest portfolios combine both: exposure to multiple regions with multiple return drivers, across both public and private markets.

Returning to Vanguard’s thought experiment: in 2015, nobody knew which region would outperform over the following decade. The only certainty was that gains in one part of the market could offset losses in another. That is exactly what happened.

The same uncertainty exists today, magnified by trade wars, fiscal imbalances, and the pace of technological change. Investors who anchor their portfolios to what has worked in the recent past, whether that is the US, the GCC, or any single market, are not making a strategic decision. They are making a bet.

A globally diversified portfolio is not a bet on any one outcome. It is a structure designed to perform across many outcomes. In a world where the range of possible outcomes has widened considerably, that structure is more valuable than ever.

At The Family Office, we design portfolios built for exactly this environment. Our approach spans geographies, asset classes, and investment horizons, combining exposure to global markets with access to private equity, private credit, and real estate opportunities that have historically been available only to institutions.

For investors across the GCC, we provide the structure, the access, and the expertise to build portfolios that do not depend on any single market performing well. Portfolios designed not just to pursue returns, but to hold up when markets do not.

If you would like to discuss how your portfolio is positioned for the environment ahead, we would welcome the conversation.

The Rise of Private Debt: A New Era for Capital Markets and Portfolios

Wednesday, November 8, 2023

4:00 pm (GMT+3)

Language: English

Shahab Rashid discusses the rise of private debt, marking a new era for capital markets and portfolios, including:

Speaker

Shahab Rashid

Moderator

Naji Nehme, CFA

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