Framing the challenge
Equity portfolios built around global market-cap benchmarks no longer reflect the shape of the world to come. What is often treated as a neutral allocation embeds specific structural exposures – to US dominance, tech-led growth, and USD strength – that are increasingly regime-dependent. This paper sets out a regionally structured equity sleeve as a more balanced and resilient way to express long-term equity exposure, informed by robust methodology and aligned with a world that is fragmenting along economic, geopolitical, and institutional lines.
The problem with status quo
Market-cap weighting remains the default option in global equity allocation. Its appeal lies in its ease of use, which is why it is the most prevalently applied approach to create portfolio benchmarks. It reflects the size and liquidity of listed companies, requires limited forecasting, and is straightforward to scale. But the inclination to take such benchmarks as the base case for equity allocation can harden into complacency.
Market-cap indices embed specific exposures that are neither neutral nor static. They concentrate risk in a narrow set of countries, sectors, currencies, and styles – especially US large-cap growth stocks, with dominant weight in technology and unhedged USD exposure. These features were rewarded in the last cycle but are not universally robust across regimes.
A portfolio that tracks market cap expresses an implicit view: that US dominance, tech leadership, and USD strength will persist. These are not constants – they are outcomes of a particular macro-financial environment shaped by globalisation, easy monetary policy, and deflationary bias, all of which are receding.
What is missing is intentionality. Market-cap weighting reflects capital accumulation, not future opportunity. It does not adjust for concentration risk or align with emerging regime shifts. It cannot incorporate forward-looking themes or structural change.
This paper starts from a different premise: portfolios should reflect where the world is going, not just where capital has been deployed. In an environment marked by fragmentation, fiscal drivers, and diverging policies, equity exposure must be more deliberate. The goal is to reframe global equity allocation for greater structural balance and resilience.
Market cap is not neutral: Understanding the concentration
In investment strategy, “neutral” is often shorthand for an allocation that carries no active views – a benchmark exposure that reflects the world as it is. Market-cap weighted indices are typically treated this way: as a neutral representation of global equity opportunity, requiring no further intervention. But neutrality in form is not neutrality in effect.
A market-cap weighted portfolio reflects where capital has accumulated – not necessarily where future returns are most likely, nor where risk is best diversified. It is the outcome of past price movements and capital flows, shaped by prevailing trends in monetary policy, globalisation, and technology. What appears passive is, in fact, a concentrated expression of specific macro and market conditions.
Consider the MSCI All Country World Index (ACWI), the dominant benchmark for global equities. Over 60% of the index is allocated to US equities, with more than 10% concentrated in five companies (See Exhibit 1). Sector weights are skewed heavily toward technology and communications (See Exhibit 2). Growth dominates as a style, and unhedged USD exposure is implicit in the structure. Each of these elements introduces directional risk – to interest rates, to the business cycle, to regulation, and to currency – even if the allocation is described as neutral.
While many large companies operate globally, the structure of market-cap indices still reflects the geography of listings. These indices carry embedded exposure to domestic currency, regulation, and macro policy – factors that may not align with the global footprint of underlying businesses. A regional allocation does not presume that companies are tied to local demand, but rather recognises that capital markets reflect region-specific combinations of risk, policy, and capital formation.
Exhibit 1: MSCI ACWI country composition (largest countries >1% allocation only)
Source: BlackRock Aladdin, Bank of Singapore.
Exhibit 2: MSCI ACWI sector composition
Source: BlackRock Aladdin, Bank of Singapore.
This pattern of concentration reflects a particular regime: one in which falling rates, US tech leadership, and capital-light scalability have been dominant forces. That regime has been favourable to large-cap US equities, and index composition evolved accordingly. But a portfolio shaped by past winners is not necessarily equipped for the next cycle – especially in an environment marked by policy divergence, regional reindustrialisation, and shifting growth drivers.
The implications are practical. A market-cap weighted equity portfolio is not diversified across macro regimes, styles, or currencies. It assumes the continuity of US dominance, tech-driven profitability, and USD strength. These are not baselines; they are embedded bets.
In this sense, market cap is less a neutral benchmark than a trailing narrative. And in a world where forward-looking uncertainty is increasing – across policy, geopolitics, and capital formation – it is worth re-examining what role such a structure should play in a strategic allocation.
The new global regime: Why the world has changed
The case for rethinking equity allocation begins with recognising that the macro environment underpinning global markets has changed. The post-Cold War era – marked by US-led globalisation, disinflation, and deepening financial integration – is giving way to a more fragmented and regionally driven order. Capital remains global, but its flow is increasingly shaped by domestic policy, geopolitical alignment, and supply chain redesign.
These are not cyclical shifts, but structural ones, which Bank of Singapore has written on extensively – most recently in our 2025 Supertrends - Rethinking Portfolios Reimagining the world (July 2025).
One feature of the new regime is the rise of multipolar power centres, each with distinct macroeconomic conditions, institutional frameworks, and strategic objectives. The US, China, India, the European Union (EU), and Japan now influence global markets not just as trading blocs, but as policymakers driving capital formation through domestic industrial strategies. This dispersion of influence is mirrored in the capital markets, where the alignment between geopolitical blocs and financial flows is becoming more explicit.
The return of the state as an economic actor is another defining feature. Public investment, industrial policy, and strategic subsidies are driving capital flows. Defence spending, digital infrastructure, and climate transition are being pursued not only for economic reasons but for security, sovereignty, and strategic competitiveness. These policy initiatives are regionally rooted – and so are their equity market beneficiaries.
At the same time, currency dynamics are becoming less unipolar. The USD remains dominant, but its role as the default global denominator is being gradually eroded by diversification in trade settlement, reserve holdings, and cross-border capital flows. This has implications for portfolio construction – particularly for those built on the implicit assumption of USD strength and stability.
Finally, growth itself is also diverging. The synchronised global cycle of the early 2000s has fractured. Today’s growth trajectories vary meaningfully by region – driven by demographics, fiscal capacity, institutional frameworks, and energy exposure. This makes capital more sensitive to local policy and less tethered to a global beta.
Together, these developments point to a world that is no longer organised around a single axis of growth, risk, or return. In such a regime, portfolios that lean too heavily on one market, one currency, or one style are less resilient – not because those exposures are wrong, but because they no longer represent the world as it is evolving.
For strategic asset allocation, this calls for a broader lens. It requires investors to reconsider the underlying structure of the world that drives expected investment returns and risk. Regional equity allocation becomes a way to map that structure – to reflect how economic power, policy autonomy, and investment opportunity are being reshaped.
Regional allocation: A more deliberate and resilient approach
Shifting from a market-cap weighted portfolio to a regionally structured equity allocation is not a tactical view – it is a strategic design choice. It reflects a belief that equity risk should be expressed in ways that are more balanced, better aligned with structural differentiation, and more resilient to a changing world. It requires a disciplined framework for setting allocations that are grounded in capital market assumptions, calibrated for risk, and resilient across regimes.
At Bank of Singapore, regional weights are set through a RO process – a quantitative framework that acknowledges uncertainty in capital market assumptions and macro regimes. Rather than chase a single forecast, it seeks portfolios that perform reasonably well across many.
To quickly recap: rather than relying on a single point estimate of expected returns or volatility, RO recognises that future states of the world are inherently uncertain. It seeks allocations that deliver reasonable performance across a range of plausible macro and market conditions, rather than maximising performance under a single forecast. This is particularly relevant in equity allocation, where regional return distributions are increasingly shaped by policy regimes, geopolitical alignment, and structural growth models.
This approach enables portfolios to avoid inherited concentrations and the resulting regional allocation becomes a way to map structural variation – in growth models, policy priorities, institutional frameworks, and currency regimes – with each region contributing distinct attributes:
The resulting portfolio is more diversified across dimensions often overlooked by market-cap weighting:
Exhibit 3: Key style exposures in regional equities (in descending order of significance)
Source: BlackRock Aladdin, Bank of Singapore. Style definitions: Market: Captures risk associated with general equity market movements; Size: Company size based on market capitalisation and fundamental data; Momentum: Longer-term trend in stock prices over the last year; Liquidity: Various measures of trading activity and price impact; Value: Identifies cheap vs. expensive stocks relative to fundamentals; Earnings Yield: Earnings-to-price & related measures; Dividend Yield: Dividend-to-price; Profitability: Return on equity (ROE) and related measures; Growth: Historical growth in assets & sales; Leverage: Various measures of indebtedness; Sentiment: Sensitivity of stock return with changes in the VIX index.
This approach is a structural rebalancing – a way to express equity exposure in a way that reflects plausible future states of the world, and not just where capital has accumulated. Through RO and regional logic, the equity sleeve becomes better positioned for resilience across a range of outcomes.
When does this outperform? When might it lag?
With the regional structure in place, it is important to understand how such a portfolio tends to behave across different conditions, particularly relative to standard global equity reference point (MSCI ACWI).
The following return patterns describe how the regional sleeve has historically performed relative to MSCI ACWI, under different macro and market conditions.
When the allocation tends to outperform
When global growth is not dominated by the US but instead distributed across Asia, Europe and Japan – often driven by manufacturing, infrastructure, or policy investment – the regional sleeve benefits from its balanced exposure.
Non-US equities gains from local currency strength during periods of broad USD depreciation or FX dispersion.
The regional sleeve has less exposure to growth-heavy US tech and more to financials, exporters, and industrials. It benefits when leadership rotates away from high-duration growth stocks.
Themes such as climate transition, infrastructure, and industrial policy often show up more clearly in Asia and Europe. These regions gain when global capital formation is driven by government policy or real asset investment.
The following Exhibit 4 summarises how the regionally diversified portfolio is better positioned in a climate of radical uncertainty, secular changes to growth and the USD, and given the limited longevity of equity leadership.
Exhibit 4: A more regionally diversified equity portfolio can capitalise on key secular shifts
Source: Bank of Singapore.
When the allocation may lag
Periods where US earnings, innovation, or macro policy dominate can lead to concentrated market-cap index outperformance – particularly if leadership is narrow and index-heavy.
With meaningful unhedged exposure to non-USD currencies, the regional allocation may underperform when the USD strengthens materially – historically this has happened during global stress. This sometimes may only reflect the currency translation effects on local equity returns, even if underlying fundamentals remain sound.
In concentrated bull markets led by a small number of US mega-cap tech stocks, the equity sleeve – by design – has a smaller allocation to the drivers of index-level outperformance.
While this note focuses on asset allocation, it does so with the understanding that long-term equity returns are driven by the underlying earnings power of listed companies. Security selection remains critical. The role of regional allocation is to create a structure that reflects differentiated sources of return and risk–allowing stock selection to operate within a more balanced and resilient investment universe.
A portfolio built for balance, not bets
These return patterns do not define success or failure, and they have been assessed over shorter horizons than the intended duration of an SAA. The regional equity sleeve is constructed not to outperform in any specific regime, but to avoid overexposure to any one of them. It reduces reliance on the persistence of US tech dominance, embeds natural currency and style diversification, and increases sensitivity to global – rather than US-centric – capital formation.
In a world shaped by multiple growth models, policy regimes, and macro uncertainties, that balance is not just defensive. It is forward aligned.
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