Want an inflation-ready portfolio? Top economist says a traditional route won't cut it

Published Wed, May 4 202211:08 PM EDT

Lucy Handley @in/lucy-handley-b2b0a61a/@lucyhandley

Societe Generale's global head of economics, Kokou Agbo-Bloua, explains why the firm is changing up the traditional 60/40 portfolio. Bonds are usually seen as a safer investment than stocks and investors use them to balance the risk in their portfolios — traditionally with a 60% equity and 40% bond split. But both bonds and stocks are currently underperforming, Agbo-Bloua told CNBC's "Squawk Box Europe" on Friday. "We are essentially de-risking our equity allocation," Agbo-Bloua said. "So below the 60%, more around 50%, 50-55[%]. Within the equity universe, we do like quality income assets with strong balance sheets, because in an environment of high inflation, what investors are going to look for is income," he said. Agbo-Bloua said that companies with good balance sheets and high dividend incomes are showing less volatility than bonds. "Safe assets are no longer bonds, but they are high income and high yielding quality equities," he added. The bank is also diversifying, he said, picking companies with "strong pricing power" as well as firms with exposure to the energy transition away from fossil fuels and toward renewables. "We'll see hundreds of billions of investments, if you look at the Green Deal in Europe, for example, and this will create a supercycle in some of these sectors," Agbo-Bloua stated. The EU wants to reduce greenhouse gas emissions by at least 55% by 2030 from 1990 levels, and could boost stocks in the rail and electric vehicle sector , according to Morgan Stanley . Bond buying "What's quite fascinating is that the bond market, that's supposed to be the shock absorber of a multi asset portfolio, is today more volatile than parts of the equity markets," Agbo-Bloua said. "We do think that bonds, when yields rise, will become interesting again," he added. Investors are looking to balance the effect of high inflation with rising interest rates — the Federal Reserve has raised rates for the first time in three years — which means the cost of borrowing money increases and the yields on bonds also increases. Read more JPMorgan says to buy these infrastructure stocks because of rising rates and geopolitical tensions These stocks show pricing power, a look into Q1 earnings results reveals CNBC Pro Talks at Milken Global Conference: Investors talk inflation, Fed, crypto "You have a situation whereby the market is wondering whether all of this type thing [central bank tightening] is not going to trigger a recession, but at the same time, what I find fascinating is that governments in Europe and in the U.S. are also forced into protecting lower income households from the higher cost of living," Agbo-Bloua added. "So, you have a bit of tension between government on the one side looking to tighten … and governments that are trying to fight back which leads to higher levels of activity in the bond market," he said. — CNBC's Jeff Cox and Silvia Amaro contributed to this report.

Societe Generale's global head of economics, Kokou Agbo-Bloua, explains why the firm is changing up the traditional 60/40 portfolio.