Hello and welcome. What's the safest safe haven investment right now? That's a question that many investors are asking as we see the economic turmoil of 2022 continuing to the first quarter of 2023. I'm Jonathan Piri from the money Mind team and we're looking at the five things you need to know about safe haven investments. Joining me today are Stephanie Leong, chief Investment Officer at Stash Away and Vasu Menon, Executive Director of Investment Strategy at O CBC Bank.
Now let's get started with a definition of safe haven. They are investments that traditionally offer investors protection in the event of market downturns. Recent events such as the banking crisis in the US and Europe. And a rise in tensions between the US and China have led to a flight to safety by investors given this backdrop are traditional
safe havens. Still the safest place to put your money. Stephanie, if we think about traditional safe havens, typically we think about bond and maybe go and a very traditional way of doing asset allocation is something called the 60 40. Basically, you have 60% of your investments into stocks and 40% into bond, the 60 40 portfolio actually has not been doing well in 2022 at all. Indeed,
it fell by 18%. So which means that actually bonds did not provide the protective characteristic that it was supposed to do in 2022. And there was a particular reason for that inflation has been rearing its head across developed markets and, and particularly in the US that resulted in the fed hiking interest rates very aggressively. If we look at the pace of the fed's interest rate hikes in 2022 it was historically one of the fastest rate hike cycles that we've experienced.
So with interest rates rising so quickly, bond prices actually fell a lot. So last year, if you were invested into bonds, you would have lost money and actually in some loan two as stocks now, does that mean bond is no longer a safe
haven asset? We think that looking forward that may change because if we look at recent inflation data, although the absolute level of reading is still quite high inflation is starting to come off and we will expect given the tightening that has been going on, we think inflation will actually further cool down in the coming months, which means that actually bonds may be able to perform better going forward. Vasu do you agree that bonds remain a good safe haven asset
investment. Great Bond are bonds with higher credit rating in the interim before the maturity of the bond. If interest rates move up and down, it can affect the capital value of the bonds. But if you hold the maturity and there's no default or minimal default risk that you get your capital back and along the way, you are able to clip coupon as well. Not all safe havens carry zero risk. Some of them may involve a case where prices can fall
in the short term. But typically if you hold them to maturity for investment rate bonds or treasury bills or fixed deposits, the risk is minimal. For example, in the case of treasury bills, if you buy a six month treasury bill, it can offer you a decent yield of more than 3% based on the current pricing. But if you get out of the treasury bill before it matures, you could incur losses. So similarly, in the case of fixed deposits, if you get out too early, it's possible that you lose interest
or perhaps even a penalty. In the case of some banks that may impose a penalty. In the case of investment grade bonds which carry a much lower risk. If you hold it to maturity, there is no default, you get your money back. But in the interim, the value of the bond may fall or rise depending on how interest rates play out during that period. But in the case of unit trust, of course, comes at risk. So not everything carries zero risk. So
even a safe haven asset may not be 100% safe. Now, if I'm truly risk averse, then should I just stay out of the market? Just keep my cash in the bank. The safest investment is always cash. But you have to ask the question of whether that money the bank is actually still giving you the biggest bang for the buck. Even though the fed has increased the interest rates for a lot of banks, they may not
be able to pass through the whole benefits to the depositors. Also, we're seeing what's happening in some smaller banks uh in the US in terms of like S B B or C bank. Even if you park your money in the bank, you should ask yourself number one, am I getting like the best return possible with similar risk? And secondly, make sure you also do do diligence on your bank to make sure it's safe. And let's not forget about the impact that high inflation
has on cash. So what about another traditional safe haven asset? Gold gold has been doing quite well last year even though it did not have an absolute upside in terms of return, at least it outperformed both bonds and equities and it ended the year flat. Gold has rallied a lot. It's up 7 to 8% in the first quarter. So gold uh actually remains a very, very good safe haven asset. And in all the statuary portfolios we've actually allocated significant portion to gold, given it
protective nature. Bau do
you agree in the case of gold, it's been very volatile in the last couple of years. If you look at the price of gold, it's been extremely volatile. It's done well in recent times over the last six months or so. Partly because interest rates have come down sharply. The US dollar has come down sharply and global uncertainties have increased, For example, the banking crisis in the US and Europe and that has increased the appeal of gold.
But having said that although gold is sometimes seen as a safe haven, it is not completely safe in the sense that the price can fluctuate up and down and it can be volatile depending on how interest rates and the US dollar and global uncertainties play out. So for example, if risk appetite returns to the market that will take the shine away from gold and gold may not do as well in such an environment.
So a lot depends on what the FED decides to do with regards to the interest rates. Now, how will that play out and impact gold?
Higher rates in the US will typically impact some safe havens like gold negatively, higher interest rates in the US will result in the US dollar heading higher and that will make gold for example, more expensive because it's an asset class is price in US dollars. But on the flip side, what has happened in the last six months is the US dollar has weakened by about 10% or so. Essentially, the interest rates in the US US treasury yields have also come down
quite significantly. And that has increased the appeal of gold and resulted in gold prices actually going up. Now, going forward, the outlook for interest rates is uncertain. But you know, the general view appears to be that interest rates are close to a peak. And if we see a recession sometime in the next 12 to 18 months, central banks including the Federal Reserve could cut interest rates and when the fed does that, the US dollar will probably come down even more and
the appeal of gold will improve even more. So in that respect, gold has more upside if you take a view of, you know, 12 to 18 months. But along the way, gold prices can go up and down and can be quite volatile depending on fed rhetoric depending on how interest rates play out over that period.
Just to recap, investors need to know that not all Safe Haven assets come with zero risk. Traditional safe havens like bonds did not do too well last year, but look set to make a comeback in 2023. Another Star Wars Safe Haven is gold which has been performing well since November last year, but may be subject to price fluctuations due to the Fed's interest rate policies in this current environment. What's your advice for investors last year. It was very, very tough to be a S allocator
because everything was expensive stocks. If you look at the S and P, it was trading at 23 times bonds by 10 year treasuries were yielded only 1.5%. So you're not being very, very rewarded by taking risk in these different asset classes. Now, fast forward to today, even though we may face an imminent slowdown or even like talks of recession in the US and elsewhere. I think actually as an asset allocator, we see more opportunities particularly for
the long term. And that's because starting valuations have come down quite a lot stocks. For example, if you look at the S and P is now trading at 18 times, which is not historically, very, very cheap, but at least it's not expensive. It's around kind of the historical average. And if I look at bonds, 10 year treasuries are yielding like 3.6%. So at least compared to 18 months ago where it was only yielding 1.5%
it's much more attractive. So I think there are actually more opportunities for us to diversify our portfolios this year. As we head into potentially a US downturn or even a recession, we need to think about two things. Number one is the risk level of your investment for investors uh with low risk tolerance or like shorter time frame. I mean, think about the risk that you take in
your portfolio. Is it appropriate for that? For example, if you have too much equities, I mean, now may be a good time to think about adding uh some of the more traditional safe haven assets. Uh Shorting data treasuries is a very good place. Uh Goal is also very good. And I think over the next few months as the risk of uh recession grows bigger, then I mean, longer data treasuries may start to perform better as well. So that's more on the risk management side.
The other side of thinking about your portfolio is also to keep a diversified portfolio. And this becomes particularly important as us slows down. When we look at global opportunities, actually, we see that there are some divergences in the economic cycle. For example, China is actually recovering from a economic downturn in contrast with the US entering a downturn. So adding some Chinese assets or emerging market assets, I mean, actually may help to balance out the in your US based investments.
The traditional word safe haven gives you an impression that you can only buy one or two asset classes that are completely safe where returns are guaranteed, where capital is guaranteed, given the current volatile market and given the sharp draw down in the markets that we saw in 2022 opportunities are starting to arise, but it it will be there for investors with a medium term view of the market.
And the way you manage risk in a market like this is essentially keep a diversified portfolio, put your money into perhaps funds asset classes that will not see a big drawdown if something major happens to the markets and also spread your investments out over time. In other words, buy gradually, do not try and time the markets and throw all your money into the market at a certain point in time. And that's another way to invest in the markets in
a safer way. It is not completely safe haven as in like it is not foolproof, but nevertheless, a method like this allows you to manage your risk. Because in the next 12 to 18 months, if the fed does cut interest rates and we go past a recession which could hit us in the next 12, 18 months, then the outlook for the markets will look a lot better, especially if inflation comes down, interest rates come down, economies start rebounding. And if you gradually position yourself in the markets,
you could actually end up getting decent returns. So dollar cost averaging, taking a diversified approach to investments, diversifying your investments through vehicles like unit trust, for example, may be different ways for you to actually manage risks and to invest in a safer way in the
markets. So the best safe haven is actually managing risks safely. What are the top two risks that investors should be paying more attention to
the number one risk in the market right now is inflation. The markets are very focused on inflation because that drives the hands of the FED. The FED has resisted cutting interest rates because it feels that inflation is still high. But if inflation comes down in a meaningful way, then there's room for the fed to cut interest rates. And historically, when interest rates are cut, that is good news for equity investors. It's good news
for bond investors. We are not there yet but investors are keeping a very close eye on inflation numbers in the US to see how that plays out because it has a big impact on us, interest rates and US monetary policy. Now the second big risk that markets are also worried about at the back of their minds, it does not emerge to the forefront is recession risk because interest rates in the US have gone up 5% in a very short period of time. And we've seen the impact of some of that come
through in the banking crisis in the US recently. So, you know, the markets are worried that that sharp increase in interest rates could hurt the corporate sector, could hurt consumers, could hurt the economy and eventually cause the US to slip into a recession. Now the US slips into a recession, that means that the earnings estimates of analysts will be taken down further and uh that could weigh on the stock markets as well.
But again, we see a recession as possible in the second half of this year and the US, but we see a shallow recession and typically when the market emerges from a recession and interest rates are cut equities and bonds tend to do fairly well. So investors shouldn't be overly consumed by some of the head winds and risks that they see right now. Some of that head winds
and risk actually are like a two sided coin. They come with risk and they also offer opportunities for investors with the risk appetite, but who are prepared to hold for perhaps a 2 to 3 year period?
Last question to you, Stephanie with all these risks out there, should investors stick to the 60 40 portfolio allocation? Depends on your time horizon and risk tolerance. Bonds and equities are the biggest asset classes globally. And asset classes have a common characteristic which is that they would go up over time. So for example, us, stocks have returned about 10% per year in the past 50 years. I mean bonds have returned like also mid single digit during the same period.
So if you hold these things kind of long enough, you would reap the benefit of long term investing returns and also compounding as well. So for long term investors, I think it's ok to hold on to 60 40. The other aspect of this is that even though over the long term, I mean, these things tend to go up in the short term they would face volatility as well. There are like drawdowns and I think what we experienced in 2022 was an inflation led drawdown which kind of impacted both as a classes.
Most of the time equities would tend to have more drawdown. But 2022 was a quite extraordinary year. Inflation fear should start to abate over the coming months. So I mean that should help the bond portion of the 60 40. In addition, investors apart from 60 40 may think about to that uh a little bit or adding some other asset classes I mentioned goal which is a very good addition to a traditional 60 40. The that way try to introduce uh other asset classes as well, for example,
emerging markets or like uh international equities. So those are good additions to a very traditional uh 60 40 portfolio. And remember 60 40 is a particular risk level. So if let's say, I mean, you're closer to retirement, 60 40 may not be for you, right? Some sound advice there. So just to recap, safe
Haven doesn't mean zero risk. And we saw that happening with both bonds and gold last year, but they do look set to make a comeback in 2023 though the biggest headwinds for investors this year will be inflation and a possible recession. So you need to think about the risk you're taking in your investment portfolio. The best Safe Haven is to have safer investing strategies such as
dollar cost averaging and diversifying your portfolio. And that includes taking advantage of divergences when some economies grow faster than others. And finally, it's important to know your risk profile and not just follow the traditional 60 40 portfolio allocation blindly. And that's the five things you need to know about
safe haven investments. My thanks to my guest, Stephanie Leong, Chief Investment Officer at Stash Away and Vasu Menon, Executive Director of Investment Strategy at O CBC Bank, Catch Money Mind on C N A and online at me, watch C N A dot Asia and youtube.