Safe-haven Assets are Growing in Importance
Investors face turbulent times as global geopolitical events and the ever present threat of Covid cause market volatility. Emulating returns realised from late 2020 through 2021will also prove challenging, given moderated global economic growth, high equity valuations, and rising inflation spurred on by runaway oil prices. The resultant interest rate hiking cycle will raise global bond yields, which could add pressure on expensive and volatile equity markets. “Inflation has hit multidecade highs, and growth ha shit multidecade lows,” says Renzi Thirumalai, head of investments at FNB Wealth &Investments.
And concerns about stagflation — high inflation rate coupled with slow growth —add to market anxiety. Unsurprisingly, allocations to safe-haven assets are growing in importance in diversified portfolios. “The timing and nature of market disruptions are equally unpredictable. This inherent uncertainty is why diversification should form the foundation of investment portfolio construction,” says Thirumalai. Money market funds are a popular option during volatile periods as they provide investors with liquidity and capital preservation benefits. These funds also benefit from rising interest rates. “Cash is typically used as a place to ‘park’ capital during periods of extreme pessimism or volatility,” says Erik Nel, co-portfolio manager of the Amplify SCI Strategic Income Fund .
However, as an active, high-conviction fund manager, Nel believes that cash represents a significant drag to portfolios as returns typically fail to beat inflation. “Any instrument linked to a floating rate will benefit from rising interest rates, not only money market investments. Investors looking for liquid, low-risk investments have more intelligent solutions. ”Mark Gilbert, CEO of advisory focus at NSDV, says: “While rising inflation erodes the value of cash, if investors are willing to commit some capital for about 60 months, they could achieve interest rates of up to 10% to create real returns. ”And with equity valuations at record highs, the potential for a correction creates amore compelling case for greater liquidity. “Holding liquid cash allows an invest or to exploit opportunities when other asset classes drop. ”Rising interest rate cycles typically cause gold prices to retreat, but Russia’s war has led to higher gold prices. The gold price has spiked almost 10% since the start of the year. Consequently, ratings agency Fitch revised its 2022 gold price forecast upwards from $1,700 an ounce to $1,900 an ounce.
South African Gold Coin Exchange & Scoin Shop CEO: Rael Demby
“More bullish predictions suggest gold could hit $2,500 an ounce by year-end,” says Rael Demby, CEO of the SA Gold Coin Exchange and The Scoin Shop. “While that is a remote outcome, we believe there is still additional headroom over the coming months as market uncertainty typically supports higher gold prices.” Demby believes that allocations towards gold offer a prudent strategy to mitigate some of the market volatility and inflationary risk. “However, this should form part of a sustained commitment to diversification rather than a knee-jerk reaction.” Miguel Rodriguez, chief market analyst at CAPEX.com SA, says investment funds are diversifying their portfolios with an increased weighting towards gold-related assets. “These investments balance portfolios and might serve as a hedge against the fixed income asset and stock market depreciation we are experiencing in these circumstances. Consequently, gold has risen with expectations that it will maintain this upward trend in the medium term.” Including gold in a portfolio can take multiple forms, says Rodriguez. “These include direct investment in the gold futures market, through stocks related to the gold industry, or investing in exchange traded funds that offer exposure to company shares that reflect the behaviour of the gold bullion price.”
Demby adds that physical gold held outside the banking system offers sensible diversifiers. “We have seen a huge spike in interest in gold bullion and gold coins like Krugerrands.” While considered a somewhat radical investment decision, holding gold outside the financial system provides some insurance against runs on banks or breakdowns in the system, adds Gilbert.
“However, commodities in general may offer a better inflation hedge than an all-in on gold approach. Energy, in particular, should form part of an investor’s allocation to commodities.” Nel says much depends on the length and extent of Russia’s war in Ukraine. “There are arguments for gold to bounce another 20%- 40% based on how geopolitics play out over the coming weeks. The subsequent response from global central banks and the ability of fund managers to capitalise from such events will also affect investment allocations.”
Published in the April 2022 issue of Financial Mail's Investor's Monthly - Page 21