Market regimes and why they matter

At Sarasin, a key part of how we assess investment opportunities – particularly within equities – is through the lens of market regimes: the underlying foundations on which an investment environment is built and evolves over many years. In this article, we outline these post-war regimes and explain their importance within the context of our thematic investment approach.

What are market regimes and why do they matter?

Investment markets often move in distinct patterns for extended
periods as slow-moving forces – such as demographics and technological change – interact with medium-term drivers including monetary and fiscal policy, as well as geopolitical developments.

The intersection of these forces gives rise to a relatively stable set of conventions, behaviours, and institutional arrangements that characterise each period. These patterns persist for defined stretches of time that we at Sarasin refer to as market regimes. Identifying and interpreting these regimes sits at the core of our investment philosophy.

The regimes we have identified and outlined below span several decades, reaching back to the end of the Second World War in 1945. When examining these periods, it is important to recognise that, within any given regime, variables such as growth, inflation, interest rates, and bond yields oscillate around distinct trends. However, these trends do not persist indefinitely; regimes shift when imbalances accumulate over time – for example, during the global financial crisis of 2008–09, or the breakdown of the Bretton Woods system in the early 1970s[1] (which had maintained fixed exchange rates, with the US dollar convertible into gold at $35 per ounce).

Regimes can also shift in response to external shocks, such as the end of the Cold War in the early 1990s, or more recently, the global Covid-19 pandemic. These transitions are often marked by sharp market movements, followed by a gradual adaptation to the new trend. For us as investors, it is crucial to recognise that overlooking regime shifts can lead to misleading conclusions, based on anchoring to trends that no longer hold.

Our post-war regimes in historical context

With this in mind, we can look at these specific regimes in more detail. We divide the post-war period into six distinct regimes (Chart 2.1).

Looking back more than half a century to the period covered by Multilateralism, this era was characterised by the establishment of global co-operative institutions, reduced inflation and lower inflation volatility. A post-war baby boom and widespread reconstruction fuelled strong global
economic growth.

Post-Bretton Woods covers the tumultuous period following the collapse of the gold standard in 1971, driven by persistent US current account deficits. The OPEC oil embargo of 1973,[2] followed by the Iranian Revolution in 1979, triggered a dramatic surge in inflation. With monetary and fiscal policies remaining too loose, inflation expectations became unanchored and the global economy entered a period of stagflation.

The 1980s and 1990s brought the Great Moderation, marked by the reassertion of monetary discipline, supply-side reforms and the end of the Cold War. This ushered in a multi-decade period of stable, low inflation and reduced economic volatility. Interest rates declined, and business cycle fluctuations diminished sharply.

China’s accession to the World Trade Organization (WTO) and the expansion of internet connectivity across the economy represented a positive supply shock. Globalisation accelerated, goods prices experienced sustained deflationary pressure, and inflation continued to decline.

This regime of relative stability came to an end with the global financial crisis of 2008, which ushered in a prolonged period of deficient demand – Secular Stagnation – as the balance sheets of banks, households and governments came under severe strain. In response, central banks pursued an aggressive strategy of financial repression: policy rates were cut to the zero lower bound, and large-scale asset purchases compressed term premia across fixed-income markets.

Weak private demand, combined with persistent goods-price disinflation driven by China’s integration into global supply chains, exerted further downward pressure on inflation, causing it to remain persistently below central bank targets.

Crucially, we believe that in recent years we have entered a new regime of Global Fragmentation. The post-pandemic global economy is shifting decisively away from an open, co-operative framework towards a more fragmented system dominated by power politics. In this less globalised world, governments must confront mounting fiscal pressures, climate-related challenges, ageing populations and heightened geopolitical insecurity. These forces are likely to result in more frequent supply shocks and less flexible supply chains. As a consequence, inflation and its volatility are expected to rise, accompanied by higher interest rates and term premia.

Regimes in practice: the role of inflation

For us as long-term investors, these regimes define the broad contours of the investment landscape. They drive the behaviour of key variables that we monitor closely: inflation, interest rates, term premia (the extra return investors demand for holding longer-term bonds instead of rolling over short-term ones), growth and economic volatility.

In this context, regimes are best illustrated by the behaviour of inflation in the post-war US economy. While US inflation has averaged about 3.4% over the past 75 years,[3] there have been wide divergences sustained over long periods. After 1945, as multilateral institutions were established, inflation averaged around 2%, and its volatility declined sharply. In the early 1970s, the breakdown of the Bretton Woods arrangement, coupled with accommodative monetary policy, unmoored inflation, which averaged nearly 7% per year. In the early 1980s, policymakers adopted aggressive measures to re-anchor inflation expectations. Supported by supply-side reforms, inflation fell to around 4% during the 1980s and 1990s.

With the acceleration of globalisation in the early 2000s, inflation declined further, averaging about 2.7%. Following the global financial crisis of 2008, inflation continued to drift lower despite unprecedented monetary accommodation, settling at an average of 1.7%. Today, inflation has proved more persistent, remaining around 3% since 2021, and we expect it to stabilise within a 2.5%–3% range. Chart 2.2 illustrates the US Consumer Price Index (CPI) for headline inflation since the 1940s. It is worth noting that there can be persistence across regimes. For instance, inflation continued to fall on average through several of our identified regimes – from the 1980s to 2020 – encompassing the Great Moderation, Globalisation, and Secular Stagnation.

The drivers of this decline, however, have differed over time. During the Great Moderation, central banks adopted explicit inflation targets and pursued policies of opportunistic disinflation. In the era of Globalisation, China’s integration into the global trading system acted as a sustained positive
supply shock. During Secular Stagnation, the global economy experienced persistent shortfalls in demand as households and banks sought to rebuild their balance sheets.

Inflation is not the only variable to display regime-dependent behaviour. Interest rates, economic growth, term premia and volatility have also followed distinct patterns in response to shifting macroeconomic regimes. Chart 2.3 summarises how these dynamics have evolved within the US economy.

Regimes in the context of our themes

For us, examining long-term regimes goes hand in hand with our focus on thematic investing – capturing the enduring trends that influence markets and economies over extended periods. Slow-moving drivers such as demographics and technological change are key sources of thematic growth, expressed through our themes of Evolving Consumption, Ageing, Automation and Digitalisation. However, when a regime shifts due to material change in the macroeconomic or geopolitical environment, it can act as a catalyst for new thematic opportunities. At Sarasin, we have often introduced new themes at these regime turning points.

For example, in the early 2000s, as the Globalisation regime gathered momentum, we introduced our now-retired Global Convergence theme. This led to increased allocations to emerging markets – an approach that, in hindsight, proved highly successful. In the early 2010s, in the aftermath of
the global financial crisis, we recognised the emergence of Financial Repression and reflected this in our asset allocation through a measured pro-risk bias. More recently, following the global Covid-19 pandemic, we identified the breakdown of Secular Stagnation and the emergence of a new regime, which we define as Global Fragmentation. We subsequently explored the implications of this regime shift for equity markets and, in 2024, introduced a new equity theme under the heading Security (see House Report Q2 2025).

How regimes inform our investment choices

We believe that applying a regime lens enables us to calibrate investment decisions more effectively. As we have shown, the distinct behaviour of inflation, interest rates, term premia, growth and volatility within each regime shapes asset returns, correlations between asset classes and, ultimately, broader market structures.

While we were not personally investing fifty years ago, history offers clear lessons. After the breakdown of Bretton Woods in the 1970s, rising inflation pushed up both bond yields and equity risk premia, eroding their diversification benefits within multi-asset portfolios. In contrast, during Globalisation, disinflation supported both equities and bonds, resulting in a negative correlation that enhanced multi-asset portfolio performance. During Secular Stagnation, persistently low growth, subdued inflation and near-zero interest rates favoured long-duration and illiquid assets such as growth equities, infrastructure and private markets.

Today, as we transition into Global Fragmentation, we expect inflation to remain elevated by historical standards. This view is reflected in our strategic asset allocation: a long-term positive outlook for global equities, a preference for short-maturity bonds, and selective exposure to alternatives such as gold that can help protect against the rising cost of living.

We believe that viewing economic history through the lens of regimes – combined with our global thematic approach to investing – gives us a powerful framework for securing our clients’ wealth over the long term.

[1] https://www.federalreservehistory.org/essays/
bretton-woods-created
[2]https://www.federalreservehistory.org/essays/oil-shock-of-1973-74
[3] https://www.officialdata.org/us/inflation/1951-to-2025

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