Market Views: Two safe-haven assets to protect portfolios
Without doubt, the turbulence of 2022 is continuing well into 2023.
As we approach the end of the first quarter, investors continue to fret about a range of challenges.
With interest rates still marching upward as central banks struggle to contain inflation – partly and indirectly fueled by the ongoing war in Ukraine and other geopolitical tensions – the era of tightening liquidity has started to have ripple effects in financial markets and economies.
The recent UBS takeover of Credit Suisse that came shortly after the collapses of Silicon Valley Bank and Signature Bank have exacerbated those fears.
Doubts are now growing about the health of some mid-sized banks and raised concerns of a potential bank run. Still, the Fed hiked its funds rate on March 22 - in a bid to calm markets and signal the banking system is healthy and that the collapses in recent weeks were one-off events.
As investors start to take a wait-and-watch approach, AsianInvestor asked investment managers to pick two safe haven assets to help cushion portfolios from further incoming turbulence.
The following contributions have been edited for clarity and brevity.
Andrew Hendry, head of Asia
Janus Henderson Investors
A key question facing investors today is how to diversify a portfolio while minimising correlations to stocks and bonds.
We believe that in this climate, an actively managed, researched-driven approach to listed-property and diversified alternatives can help investors achieve these goals.
With public and private property markets delivering comparable returns over the long term, the gulf that’s appeared between their performance over the last year is significant.
Today, REITs are trading at a 25% discount to NAV – valuations not seen since the GFC – while private real estate trades at par to its NAV.
While private real estate exposure can help reduce portfolio volatility, the current arbitrage opportunity in public markets may prove too difficult to ignore.
Additionally, the traditional resilience and stable income of listed property should help blunt effects from persistent market volatility.
Alternatives cover a broad range of strategies and in the current climate, we think investors can consider a multi-strategy approach which seeks to balance exposure to a range of adaptive “alternative” strategies designed to thrive in abnormal market environments.
Michele Barlow, head of investment strategy and research, Asia Pacific
State Street Global Advisors
While government bond securities are now offering better yield relative to a year ago -- and it is looking like we are getting close to the peak in rates across many markets -- inflation has remained sticky, which has created market uncertainty and volatility.
On this basis, we think cash is a better near-term safe haven asset given the currently attractive yields, liquidity offered by the asset, and its ability to reduce volatility in portfolios.
However, we do think that on a longer term basis, government bonds will once again provide diversification in portfolios after the repricing we’ve seen across markets.
Gold is another safe haven asset that we see as attractive for asset owners today.
In a portfolio the asset provides diversification given its low correlation to stocks and bonds, it also provides a hedge to inflation, and is an asset which benefits from flight to safety during times of rising geopolitical tensions.
Gold has caught a tailwind with the weakening in the US dollar as we near a peak in the Fed funds rate, and is supported by the higher real yield/inflationary environment, and strong investment demand.
Cecilia Chan, Asia Pacific chief investment officer
HSBC Asset Management
A new mix of supply and demand forces, such as higher indebtedness and ageing societies on the demand side, along with the transition to net-zero and the end of hyper-globalisation on the supply side, translates to more persistent inflation and new policy choices for governments and central banks.
In our view, this new economic and market regime requires a corresponding change in the approach to portfolio allocations.
We’ve watched stock and bond correlations turn positive last year, marking the formal end to a more than 20-year period where it could be argued that diversification through stocks and bonds was good enough.
This means the need for new diversifiers has intensified.
High uncertainty and turbulent markets imply a focus on alpha over beta. Country allocations may become an important source of portfolio resilience.
At this juncture, we prefer investment grade credit bonds, stock sectors that benefit from China re-opening such as airlines, tourism and catering etc. as well as undervalued China A shares.
We are also seeing some interesting themes in the alternatives space, notably on defensive parts, like infrastructure equity, and different economic exposures, like natural capital.
Strategies such as hedge funds also continue to look like one of the attractive diversifiers for asset allocators.
Chang Hwan Sung, portfolio manager
Invesco Investment Solutions
We like fixed income over equities, and within fixed income, we prefer taking more duration risk at the expense of credit risk, favoring investment grade credit and government bonds, staying away from riskier sectors such as loans, high yield, and emerging markets debt, given the downshift in global risk appetite.
Income strategies remain attractive, especially relative to equities, given the higher level of real and nominal yields, and spreads at historical long-term averages.
In this low growth environment with transient and data-dependent investor sentiment, investment grade provides a defensive solution with attractive yields between 5-6%.
We continue to favor nominal treasuries relative to inflation-linked bonds.
Within equities we like defensive factors with low operating leverage and lower exposure to economic risk such as quality and low volatility, at the expense of cyclical exposures such as value and small/mid-caps.
Similarly, we favor defensive sectors such as health care, staples, utilities, and technology, at the expense of financials, industrials, materials, and energy.
From a regional perspective, we continue to favor developed ex-US equities relative to US equities, driven by continued cyclical divergence between the regions, with positive momentum in Europe relative to the US, and still favorable currency valuation.
Raf Choudhury, investment director of multi-asset investment
abrdn
As we saw last year, the effectiveness of any asset to play to its traditional defensive/safe haven role is dependent on the environment both macroeconomic as well as monetary and fiscal.
This was clearly evident last year when central banks went on a rate hiking spree that saw the traditional safe haven of treasuries sell off providing fixed income and multi-asset investors very little protection.
Now though we are much closer to the tail end of the rate hiking cycle, with interest rates at the highest levels seen since the global financial crisis.
Given that, cash is definitely one of the safe haven assets that investors need to look at.
For 2023, cash is once again king and will act as a ballast for multi asset portfolios to be able to take risk elsewhere in the portfolio.
Along with cash, treasuries also have to be considered, especially short dated T-bills where yields are in excess of 4%. That’s almost a no-brainer.
Beyond the more obvious safe havens such as US dollar and gold, we think defensive stocks are worth considering.
In particular companies that provide essential goods and services, such as food, healthcare, and utilities.
These companies tend to perform well during economic downturns as people continue to consume their products and services.
And real estate is an area that we are also exploring.
Valuations are looking more attractive given the selloff we saw last year and when we see central banks pause and potentially pivot they could benefit from a re-rating. It might not be the right time just but certainly one to keep an eye on.
Kelly Chung, investment director and head of multi-assets
Value Partners
We view Chinese equities and gold as safe-haven assets in the current market environment.
Against the backdrop of rising recession risk in developed markets, China looks to be the only bright-spot among all the major markets in achieving strong economic growth in 2023.
We believe the post-Covid consumption recovery will be the major driver of growth this year, supported by the excess savings of US$2.6 trillion during the pandemic..
Well-controlled inflation and the clear emphasis on economic growth by the new administration suggests that there is ample room for further policy support if needed.
The de-synchronised economic and monetary cycle between China and the rest of the world makes the country a clear safe-haven this year.
Gold has been a traditional safe-haven asset, but it failed to work too well in 2022 given rising US dollar.
With falling interest rate hike expectation and growing recession risk, a weaker US dollar environment should help gold to restore its safe-haven status.
There is also a tailwind from the structural demand from global central banks’ reserve diversification, which resulted in record high gold buying last year.
This trend is likely to continue given heightened global geopolitical tensions, and would provide strong support for gold price amid market volatility.
Michael Kelly, global head of multi-asse
PineBridge Investments
After a decade of free money, inflation flared. Central banks are now scrambling to raise the real cost of money.
The Bank of Japan (BOJ) is the last mover. Their yield curve control (YCC) policy was put in place to nurture inflation.
It succeeded - its architect just retired as the Governor of the BOJ, and YCC’s artificial limit on JGB yields is still forcing the BOJ to surge their balance sheet threatening even more inflation in Japan.
When the policy ends, the Yen likely surges. Meanwhile it strengthens when everything else weakens. It’s a good haven about to get better.
Gold is another. While many assert that gold is an inflation hedge, history begs to differ.
The direction of inflation-adjusted interest rates has the best record explaining gold.
When the real cost of money is expected to rise, that puts downward pressure on gold.
That is what held gold back in 2022.
Soon, central banks will finish raising rates, and inflation will begin falling. As the real cost of money falls, gold should rise. Of course, before then, if a crisis arises - that’s the second-best predictor of what it takes to get gold to shine.