The market is consequently still in the early stages of a significant reallocation of capital, and it will take time. However, sector diversification will remain a critical benefit and risk mitigant, both across and within sectors. Diversification will take different forms in markets around the world, and even those sectors which are currently "out of favor" still have a place in global, diversified portfolios.

However, higher interest rates and an uncertain global economy have made current portfolio aspirations difficult to execute today. Current market volatility will stall diversification progress through 2024. In the near-term, investors will take a ‘step back’ in order to weather the storm and ‘step forward’, challenged by near-term liquidity needs which do not necessarily align with long-term portfolio goals. However, opportunistic sectoral diversification is already happening, in particular for alternative strategies – even at scale in the current climate, reinforcing its priority for capital.

The biggest challenge to portfolio managers is, perhaps, the future of office holdings, faced by constrained liquidity and valuation declines amid weaker global sentiment and uncertainty of future demand. Global office vacancy as of Q2 in 2024 was 16.7%, up from 12.5% at the end of 2020. Today, investors and lenders are both focused on existing office exposure, identifying those strategic and non-strategic assets and exploring alternatives to right-size office holdings.

There are still many unknowns, as uncertainty persists. The extent – both in duration and depth – of the current correction and pace of recovery will impact the extent of sector rebalancing.

And deployment will be a hurdle, given varied degrees of barriers to entry, competition and crowding-in strategies. Agility in strategy and real-time connectivity to market activity will be critical. On the other side of the storm, both institutional and private investors will find opportunities, and those opportunities will be in income- as well as growth-oriented strategies across the full spectrum of sectors.