Khaleej Times - UAE: Are gold, bonds best bets for investors amid global market turmoil?

Investors have become increasingly cautious about risky instruments as the equity markets are hammered around the world after the collapse of the SVB, Signature Bank and takeover of the Credit Suisse.

To make the matters worse, Germany’s Deutsche Bank and Switzerland’s UBS are in hot waters, too, as their shares are under pressure, witnessing massive selling last week.

In turbulent times, investors often behave in a myopic manner, ignoring the bigger picture and becoming more susceptible to loss-averse bias, which leads to poor financial decisions.

Hence, individual investors in the UAE and Gulf retail investors are urged to remain calm, evaluate their portfolio to understand their risk exposure and take a systematic approach to assess their overall holdings and weigh in the long-term prospects.

With volatility doesn’t seem to be dissipating in the near future, gold, low-volatility dividend-paying equities, and bonds — treasury bonds, high-yield bonds and highly rated corporate bonds – are the best bets that UAE and Gulf investors should take into consideration to shield against the risk and help mitigate portfolio losses, say analysts.

Is gold the best bet?

“Gold is indeed an asset to consider to hedge against market turmoil for reasons that go beyond its intrinsic value and are linked to ‘safe haven’ perception of the asset, as opposed to stocks which might suffer excessive volatility, typically to the downside in the case of economic and financial instability,” said Roberto d’Ambrosio, CEO, Axiory Global.

He said the “mood” of the market, its sentiment, is now negative and gold is an asset to consider to protect the investment portfolio. “Is it the best? It is one of the best and its weight on the portfolio should still be well balanced.”

Vijay Valecha, CIO, Century Financial, said growing fears of a recession are lending support to the yellow metal.

“However, investors should note that current prices are quite elevated. Gold prices have surged this year, outperforming all other asset classes. Therefore, corrections between three to five per cent would present a good opportunity to invest in the bullion,” he said, adding that the pause in the Federal Reserve’s monetary policy tightening is another crucial factor that bodes well for the precious metal.

According to Tawhid Abdullah, chairman, Dubai Jewellery Group, institutional investors move to gold during turmoil fairly quickly, whereas household investors respond to geo-political scenarios in a slightly different way.

“Both categories of investors assess the value and risk factors associated with their investments. Retailing of jewellery or gold could be highly price elastic. We observe that some household investors may shy away due to higher prices and some may even take it as an opportunity to dilute their gold holdings. However, it is a fact that higher price adds more confidence in the minds of consumers for gold,” he said.

“It is to be noted that gold withstands almost every turmoil and continues to shine among other asset classes,” said the Dubai Jewellery Group chief.

Alternatives

Axiory Global chief suggested that high-quality sovereign bonds are now palatable, given the rise in interest rates.

“Those who have wisely rebalanced their investment portfolio during the very long bull market on risky assets should now have a large portion of their portfolio being liquid. In this situation, a balanced portfolio would include high-quality sovereign bonds, highly rated corporate bonds (with caution and adequate research) and investors could start rebuilding the stock portfolio with a strong presence of high-quality, high-dividend stocks. For the more speculative part of the portfolio, cherry-picking on the hi-tech and banking stocks that have been hammered quite heavily during the last few months would be good,” said d’Ambrosio.

Vijay Valecha advised that to get through these difficult times, investors can opt for Treasury bonds.

“Short-term Treasury bills are an excellent method to put idle cash to use. The US one-year Treasury yield is at 4.65 per cent, so investors may earn this with virtually zero risk. Another alternative would be to make modest allocations to value and dividend-paying equities, as well as low volatility stocks, to help mitigate portfolio losses,” said Century Financial's chief investment officer.

Avoid small, mid-cap stocks, cryptos

Analysts advised staying away from small and mid-caps stocks, cryptocurrencies, emerging markets bonds and low liquidity stocks as they are far more sensitive to these headwinds.

“SMEs have more keenly felt the pinch of aggregate rate hikes and inflation, with increasing input costs and high borrowing costs hampering their growth. Additionally, private technology startups in Europe almost doubled their debt exposure to $32.7 billion in 2022. The collapse of SVB, a major provider of venture debt funding, means the source of finance and liquidity has dried up, threatening their prospects. Thus, investors need to be cautious of small and mid-cap securities that are less apt to deal with volatility,” said Valecha.

Roberto d’Ambrosio advised that high-yield bonds, emerging markets bonds and low liquidity stocks should be handled with care, knowing that they can have a high upward potential but the risk is equally high.

“Other alternative assets like cryptocurrencies should also be considered for a small part of the investment portfolio unless the investor is characterised by a very high-risk appetite. They are still showing a very strong correlation to the stock markets, which reveals the fact that unlike the narrative brought forward by the cryptocurrency enthusiasts, they are of little use as a hedge to volatility and inflation and their value is still almost completely speculative,” said d’Ambrosio.