Umbrellas and Ice Creams

Around the turn of the 1980s, Alfa Romeo was in serious financial trouble. The car manufacturer was plighted by poor quality control, it had been losing money for years and because it was owned by the Italian government it was not in a position to make significant layoffs. The company decided a joint venture with Japanese firm Nissan was the way forward.

Japanese cars had a reputation for quality engineering and reliability, but were dull and not particularly exciting to drive. Italian cars tended to be sporty with great handling and style, but were prone to things going wrong.

A match made in heaven, right? Sporty and reliable? Sounds ideal, right?

….Wrong! When the company launched the Arna in 1983 they got their formula the wrong way round. The car had the all the bulky style of a Nissan Hatchback coupled with the poor reliability of an Alfa Romeo.

The Nissan/Alfa venture was meant to be a complimentary relationship, benefitting from the best qualities of each manufacturer, but it was a disaster. Only three years later, in 1986, the Italian government sold Alfa to Fiat, who promptly canned the Arna and ripped up the Nissan agreement.

For full disclosure, when I was 18, my first car was a grey Nissan Sunny. It was a very reliable car, but didn’t impress the girls quite as much as I had hoped!

The name’s Bond

Up until a few years ago, bonds and equities had enjoyed a complimentary relationship for nearly 25 years. Over this period they tended to have a negative correlation, meaning that when equity prices rose, bond prices usually fell, and vice versa. This negative correlation is often attributed to the fact that during economic downturns, investors may seek the safety of bonds, causing their prices to rise while equity prices fall. As my old boss used to say “building a successful portfolio is like selling umbrellas and ice-creams, you should be able to make money whatever the weather”.

But even the best relationships have their challenges, and the interplay between bonds and equities underwent an abrupt change between 2021 and early 2023, a period marked by the highest rates of inflation in 40 years. Rather than returns being negatively correlated they began to move in the same direction. Investors began to question bonds’ diversification benefits. To stretch our analogy a little further, this is more akin to selling ice creams and sunglasses– all good, until it starts to rain.

As you will note from the below chart, over the long run a positive correlation between bonds and equities is actually more common.

Love don’t live here anymore

We are yet to see full consequences of the end of the zero-interest rate era, and it will take time to see how consumers and businesses behave in an environment of higher interest rates. For 25 year bonds and equities had a beautiful relationship, but nothing lasts for ever. Understanding the relationships between assets is paramount when building a diversified portfolio. We will still invest in bonds, but also use cash, commodities and defined return strategies, to make consistent returns in the current environment.

Forty years on, the great irony from the failed relationship between Nissan and Alfa is that because so few Alfa Romeo Arnas were ultimately produced, and even fewer were kept, they actually command a classic car price tag these days.

Perhaps I should have kept my Nissan Sunny!


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