By Arif Husain, CFA® , Adam Marden , Sébastien Page, CFA®

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What Makes a Defensive Asset?

With market sentiment on a rollercoaster, discover how to harness safe haven assets and tackle inflation head-on. This executive summary dives deeper into the strategies that could defend portfolios against risk downturns.

April 2025, Ahead of the Curve

Key Insights

Growth and inflation expectations are driving strategy
The dollar vs the yen
Diversification, hedging and cost
Key insights and takeaways

The global investment dynamic has changed dramatically. Growth and inflation expectations have been upended and policy uncertainty has intensified. In this T. Rowe Price Ahead of the Curve panel discussion, Arif Husain, CFA©, Head of Fixed Income and Chief Investment Officer, Sébastien Page, CFA© Head of Global Multi-Asset and Chief Investment Officer, and Adam Marden, Portfolio Manager of Macro and Absolute Return Strategies and the Dynamic Global Bond Strategy, sat down with host, Investment Specialist Amanda Stitt, to discuss what assets or strategies could prove truly defensive.

Markets are facing a new reality. Growth expectations in the US are suddenly down and inflation fears are rising. There is an unfamiliar element of investor euphoria in Europe and a new round of stimulus in China. Equities and bond yields in the US are down, but up in Europe. How can investors navigate this extraordinary reversal of norms?

“It’s exciting, confusing, unpredictable and a situation we have never before seen in our careers,” said Husain. “There are huge opportunities for asset managers, but at the same time the political setting is confusing and could easily lead to mistakes. In the end it is the type of risk that will determine the hedges investors need.”

Growth and inflation expectations are driving strategy

Investors are worried about heightened risks to growth, particularly in the US, and those concerns are linked to the uptick in US inflation and the fear that a period of stagflation is on the horizon. “The only thing that truly hedges in an extreme growth slowdown is short-maturity treasury bonds,” said Marden. “Longerterm bond hedges work, but not as well as they used to. Now the dynamic has changed, the risks are moving to fiscal deficits and the possibility of a sharp falloff-a-cliff slowdown.”

Changing bond-market dynamics have also put German Bunds in the spotlight. “Bunds may be a hedge at the short end, but possibly at the long end as well,” added Marden. “That’s because Germany now has the sort of fiscal dominance the US had over the past decade or so.”

The panel also discussed whether strategies based on bond-equity correlation could be helpful. Page pointed out that bond-equity correlations have reversed many times in history—and that these assets can move in tandem. “If you get an inflation shock or a growth shock, stocks and bonds can go down together,” he said. “But I still think that if you get a major growth shock and stocks go down by say 20%, then long-duration treasuries will outperform cash.”

"It’s exciting, confusing, unpredictable and a situation we have never before seen in our careers."
– Arif Husain CFA© Head of Fixed Income and Chief Investment Officer

The dollar vs the yen

Over recent years, holding dollars or dollar-denominated assets has proved a very good hedge. “But now,” said Husain, “You’re faced with a potential fiscal issue in the US, and unpredictable geopolitics emanating from the US, and maybe other policies we don’t yet know about like capital controls or taxes. At this point, if you’re an owner of dollars, you may be thinking of diversifying.”

Marden agreed, saying: “I don’t believe this is the end of US exceptionalism, but I do believe that the rest of the world is taking a lot of steps to close the gap. The dollar still has risk-hedging potential, but similar to the long end of the Treasury curve the hedging capabilities are a bit lower.”

Meanwhile the Japanese yen, traditionally a safe-haven currency, is increasingly talked of as a hedge as well. “Japan is the only country in the world (with the exception of Brazil) that is raising rates,” said Husain. “I think that may change the way the yen behaves. Ultimately, Japanese investors have a lot of capital invested overseas, and if there is a crisis and those Japanese investors bring home their investments quickly, then the yen could be a good hedge.”

Diversification, hedging and cost

The panel differed on the merits of diversification versus hedging. Page argued that the correlations on which diversification strategies depend have a habit of breaking down in times of stress. “You get diversification advantages on the upside, but it disappears on the downside,” he said. On the other hand, Husain argued that in times of high uncertainty, you have to reduce risk and diversification does that.

One thing that everyone agreed upon was that in hedging, whether through classic defensive equities like healthcare and utilities, or through derivative strategies, cost is critical. “The overlap between being right and making money is very, very small and you have to be super costconscious about what you’re doing,” said Marden. “There are so many different hedges at different prices that you could be completely right about what is going to happen and still lose money.”

Page agreed: “A cost-managed hedged equity strategy can give you 70-80% of the upside of stocks alone, and maybe hedge about 50% of the tail risk,” he argued. “The key is to manage it professionally.”

Key insights and takeaways

The panel concluded on a note of caution: the right strategy is better than a portfolio of strategies merely for the sake of diversification. As Page put it: “There is a famous story about a statistician who had their head in the oven and their feet in the freezer and concluded that, on average, they felt great. So: beware of average correlations. Beware of average properties of different hedges.”

Marden echoed that. “There is no such thing as a perfect hedge,” he said. “There is no such thing as a symmetric risk environment. You must look at all the risk vectors and, at the end of the day, pricing is at least as important for risk hedging as any assumption you have on correlation.”

Overall, the panel were agreed: the conditions that shape investment strategies have changed faster than anyone expected. The strength of US markets and the dollar, led by US tech, is now in question. The potential for the rest of the world to take up the slack is unproven. Both risk and opportunity are running much higher than before, but for now a bias to defensive strategies appears prudent.

The only thing that truly hedges in an extreme growth slowdown is shortmaturity treasury bonds
– Adam Marden Portfolio Manager

Arif Husain, CFA® Head of Global Fixed Income and CIO

Adam Marden Portfolio Manager

Sébastien Page, CFA® Head, Global Multi-Asset and CIO

In Canada, Dynamic Global Bond is offered as Unconstrained Global Bond.
CFA® and Chartered Financial Analyst® are registered trademarks owned by CFA Institute.

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