Beyond being an inflation hedge, infrastructure represents a key constraint on AI's growth. Investing in areas like power capacity and data compute allows investors to "own the constraint on AI," providing a diversified way to gain exposure to the dominant technology theme.
Instead of abandoning the 60/40 portfolio, investors should modernize the 40% fixed income allocation. This means moving beyond simple bonds to include assets that provide better rates volatility expression and convexity, offering more effective downside protection in an inflationary environment.
The speed of market movements has accelerated dramatically. Tactical opportunities that previously took weeks to develop and profit from now materialize and conclude within hours. This requires investors to be far more nimble and responsive to capitalize on short-term dislocations.
The S&P 500 is increasingly detached from the overall economy. With approximately 70% of its market cap in Technology, Media, Telecoms (TMT), Financials, and Energy, the index can perform well even during stagflationary shocks that primarily harm other, more cyclically-exposed sectors.
Counterintuitively, real assets like infrastructure often underperform during the initial phase of an inflationary shock. Their best performance typically occurs as inflation begins to recede from elevated levels, which can provide rates relief while cash flows remain supported by the higher price level.