SMSFundamentals | Apr 08 2025
Global investments in 2024-2025 are increasingly shifting towards a “barbell economy.” Here, capital flows are concentrated at two extremes: high-growth, high-risk assets (tech stocks, AI-tilted companies, and speculative ventures) on one end, and defensive, income-generating assets (utilities, consumer staples, and bonds) on the other.
This polarisation is emerging from macro uncertainty, geopolitical tensions, and shifting sentiment around transformative technologies like AI. The US Federal Reserve’s extended “higher-for-longer” interest rate stance, coupled with China’s economic slowdown and persistent economic weakness in Europe, has boosted the market bifurcation.
-Global markets are polarizing into high-growth (AI, tech) and defensive (bonds, staples) assets due to macro uncertainty.
-Australian investors should adopt a barbell strategy, balancing aggressive and stable investments as overexposure to growth risks corrections, while defensive assets may lag in inflation.
-Active rebalancing, sector selectivity, and macro-aware allocation are key to navigating 2025’s landscape.
By Anuj Sharma
The barbell effect is not just a cyclical phenomenon but a major structural shift in global capital allocation. Institutional investors, including managed and hedge funds, are increasingly shifting on barbell strategies amid volatility.
For instance, in 2024, US-listed ETFs have seen major inflow in tech and financials, whereas the Bond ETFs’ inflow tilted towards government bonds (mainly shortterm and intermediate duration).
Source: State Street Global Advisors
Source: State Street Global Advisors
The Australian market is not immune to this trend. Should Australian investors chase high-growth opportunities, or retreat to defensive plays? What risks emerge when the pendulum swings?
The challenge for Australian investors is determining the optimal balance between growth and safety, particularly as domestic market dynamicssuch as the ASX’s heavy weighting in financials, resources, and miningadd another layer of complexity.
Portfolio Allocation in a Barbell Market: Growth vs. Defensive Assets
Like everyone else, Australian investors are in a market where traditional diversification is challenged by the barbell effect.
On one end, high-growth sectors, mostly AI-related tech stocks, have dominated returns. In 2024, the “Magnificent Seven” tech stocks (Nvidia, Meta, Tesla, Microsoft, Apple, Amazon, and Alphabet) surged an average of 61% in USD terms, far outpaced broader indices.
This rally was fueled by massive CapEx in AI infrastructure, with global capex can hit UD$3.2trn in 2025.
Locally, ASX-listed tech firms (ATEC: BetaShares S&P/ASX Australian Technology ETF) delivered outsized gains (>40%) in 2024 based on strong earnings momentum.
However, these high-growth assets come with elevated volatility. For instance, ATEC ETF holds a beta of 1.21 with higher standard deviation over the market (A200 ETF).
ATEC’s valuation is now at circa 45X forward earrings against the market’s circa 18X. Such high PE levels can lead to corrections as observed year-to-date in 2025.
Source: TradingView
At the other end, defensive assets like gold (+26%), REITs (led by Goodman Group’s 42% surge), and Australian banks (CBA +35%) provided stability amid uncertainty in 2024.
Bonds, despite a multi-year bear market, regained appeal as yields are high at 4.6% on 10-year Australian government bonds. The yield makes government bonds a viable alternative to equities in a possible slowing economy.
The resurgence of fixed income is particularly vital, with global pension funds increasing their bond allocations. This shift towards fixed income points to growing concerns about equity market frothiness and the need for downside protection.
Source: Goldman Sachs Asset Management
Therefore, a barbell strategybalancing aggressive growth with defensive stabilitymay be optimal. For instance, 50% in high-growth, high-risk assets (25% AI/tech Stocks: Mag-7 + 25% Cryptocurrencies: Bitcoin) and 50% in defensive, income-generating assets (25% Short-duration bonds ETF + 25% Gold ETF).
This approach aligns with historical data showing that barbell strategies outperform during periods of high macro dispersion. However, implementation requires precisionoverweighting tech without proper valuation discipline can lead to significant drawdowns, as seen during the 2022 Nasdaq correction.
Source: Portfolio Visualizer (Analyst’s Compilation)
Risks of Overexposure: Growth Volatility vs. Defensive Limitations
While high-growth assets offer substantial upside, they carry asymmetric risks. For instance, the ASX200’s 2024 performance was based on multiple expansion (P/E ratio increases) rather than earnings growth (a red flag for sustainability).
Tech stocks, despite the momentum, trade at forward extreme P/E multiples making them vulnerable to corrections if earnings falter. Similarly, the AI boom, while transformative, is still in its speculative phasehyperscalers like Microsoft and Amazon are investing heavily (US$320B in AI CapEx in 2025), but the market is waiting for a head-to-head ROI.
Many AI startups are burning cash at unsustainable rates, forming a possible bubble.
Conversely, defensive assets have their own limitations. Gold’s rally is coming from central bank buying and geopolitical hedging, but may not persist if the Fed slows rate cuts.
Similarly, Australian banks, despite their 2024 surge, now trade at 17x forward P/E (>2 standard deviations above historical averages), with tepid earnings growth.
Bonds, while a bit safer, the returns here struggle in inflationary environments2024 saw Australian government bonds lose value in real terms. The real danger for investors is being caught in the middleholding underperforming “core” assets (traditional active funds) that neither capture growth nor provide safety.
Source: AGVT Factsheet
Lessons for Today’s Market: Diversification and Risk Management
The rapid rally in tech, gold, and cryptos leads to the danger of “diworsification”; holding assets that appear diversified but are correlated in downturns.
Annual rebalancing is vital to trim overvalued positions (higher P/E) and reinvest in undervalued sectors (value-based and domestic sectors like resources).
With bonds offering higher yields but vulnerable to inflation, one needs to consider blended ETFs like private credit funds or short-duration bonds to minimise rate risk. An underweight position in Australian government bonds can also be considered due to policy divergence with global central banks.
For AI, not all tech is equal. AI infrastructure (tech suppliers and hyperscalers with moat) and defense tech offer more solid growth than momentum-driven software stocks (hype-based cases).
Small caps with high earnings growth that trade at discounts can benefit from rate cuts. Similarly, Gold remains a hedge but is cyclical. Copper and uranium provide inflation-resistant exposure.
Specifically, an ASX heavily reliant on banks and miners might only offer limited upside. So Japanese equities (reflation), Indian small caps (demographic tailwinds) and emerging markets (ex-China) like Southeast Asia also present opportunities.
Source: iot-analytics
Overall, the global market’s polarisation is a structural, not cyclical, shift. Investors might avoid the “middle ground” of mediocre core holdings and instead adopt a barbell strategy for growth and for defense.
For the Australian market, 2025 may favour risk assets, but selectivity and active rebalancing are paramount.
The lessons of 2024 are clear: asset selection discipline, macro-awareness, and logical allocation can separate winners from losers.
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