Four regimes, one portfolio question

The map

We place the economy in one of four regimes using the direction of change, not the level, in growth and inflation. Direction matters because markets price the second derivative: an economy growing at 2% and accelerating behaves very differently from one growing at 4% and slowing.

Each regime has a historical pattern of winners and losers. The patterns are tendencies, not rules, and the transitions between regimes are where most of the risk and opportunity sit.

How assets have tended to behave

A simplified summary of typical relative behaviour in each regime. In practice we test these relationships country by country, because correlations shift with policy frameworks and starting valuations.

What we monitor

• Growth direction: manufacturing and services PMIs, new orders less inventories, credit impulse, earnings revisions breadth.
• Inflation direction: core and services inflation momentum, wage growth, input and freight prices, breakeven inflation.
• Policy and liquidity: central bank reaction functions, real policy rates, balance sheet changes, dollar funding conditions.

The useful question is rarely "which regime are we in?" It is "what would move us to the next one, and how is the portfolio exposed if it happens?"

From map to portfolio

For clients, we score each regime monthly, assign probabilities to the next transition, and stress test the client's actual allocation against each path. The output is a short list of exposures that are most at risk and the cheapest ways to rebalance or hedge them.