WEBVTT - 5 things about safe haven investing

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<v Speaker 1>Hello and welcome. What's the safest safe haven investment right now?

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<v Speaker 1>That's a question that many investors are asking as we

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<v Speaker 1>see the economic turmoil of 2022 continuing to the first

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<v Speaker 1>quarter of 2023. I'm Jonathan Piri from the money Mind

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<v Speaker 1>team and we're looking at the five things you need

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<v Speaker 1>to know about safe haven investments. Joining me today are

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<v Speaker 1>Stephanie Leong, chief Investment Officer at Stash Away and Vasu Menon,

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<v Speaker 1>Executive Director of Investment Strategy at O CBC Bank.

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<v Speaker 1>Now let's get started with a definition of safe haven.

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<v Speaker 1>They are investments that traditionally offer investors protection in the

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<v Speaker 1>event of market downturns. Recent events such as the banking

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<v Speaker 1>crisis in the US and Europe. And a rise in

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<v Speaker 1>tensions between the US and China have led to a

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<v Speaker 1>flight to safety by investors given this backdrop are traditional

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<v Speaker 1>safe havens. Still the safest place to put your money. Stephanie,

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<v Speaker 1>if we think about traditional safe havens,

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<v Speaker 1>typically we think about bond and maybe go and a

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<v Speaker 1>very traditional way of doing asset allocation is something called

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<v Speaker 1>the 60 40. Basically, you have 60% of your investments

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<v Speaker 1>into stocks and 40% into bond, the 60 40 portfolio

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<v Speaker 1>actually has not been doing well in 2022 at all. Indeed,

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<v Speaker 1>it fell by 18%. So which means that actually bonds

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<v Speaker 1>did not provide the

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<v Speaker 1>protective characteristic that it was supposed to do in 2022.

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<v Speaker 1>And there was a particular reason for that inflation has

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<v Speaker 1>been rearing its head across developed markets and, and particularly

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<v Speaker 1>in the US that resulted in the fed hiking interest

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<v Speaker 1>rates very aggressively. If we look at the pace of

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<v Speaker 1>the fed's interest rate hikes in 2022 it was historically

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<v Speaker 1>one of the fastest rate hike cycles that we've experienced.

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<v Speaker 1>So with interest rates rising so quickly, bond prices actually

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<v Speaker 1>fell a lot. So last year, if you were invested

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<v Speaker 1>into bonds, you would have lost money and actually in

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<v Speaker 1>some loan two as stocks

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<v Speaker 1>now, does that mean bond is no longer a safe

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<v Speaker 1>haven asset? We think that looking forward that may change

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<v Speaker 1>because if we look at recent inflation data, although the

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<v Speaker 1>absolute level of reading is still quite high inflation is

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<v Speaker 1>starting to come off and we will expect given the

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<v Speaker 1>tightening that has been going on, we think inflation will

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<v Speaker 1>actually further cool down in the coming months, which means

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<v Speaker 1>that actually bonds may be able to perform better going forward.

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<v Speaker 1>Vasu do you agree that bonds remain a good safe

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<v Speaker 1>haven asset

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<v Speaker 2>investment. Great Bond

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<v Speaker 2>are bonds with higher credit rating in the interim before

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<v Speaker 2>the maturity of the bond. If interest rates move up

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<v Speaker 2>and down, it can affect the capital value of the bonds.

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<v Speaker 2>But if you hold the maturity and there's no default

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<v Speaker 2>or minimal default risk that you get your capital back

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<v Speaker 2>and along the way, you are able to clip coupon

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<v Speaker 2>as well. Not all safe havens carry zero risk. Some

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<v Speaker 2>of them may involve a case where prices can fall

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<v Speaker 2>in the short term. But typically if you hold them

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<v Speaker 2>to maturity for investment rate bonds or treasury bills or

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<v Speaker 2>fixed deposits, the risk

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<v Speaker 2>is minimal. For example, in the case of treasury bills,

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<v Speaker 2>if you buy a six month treasury bill, it can

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<v Speaker 2>offer you a decent yield of more than 3% based

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<v Speaker 2>on the current pricing. But if you get out of

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<v Speaker 2>the treasury bill before it matures, you could incur losses.

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<v Speaker 2>So similarly, in the case of fixed deposits, if you

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<v Speaker 2>get out too early, it's possible that you lose interest

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<v Speaker 2>or perhaps even a penalty. In the case of some

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<v Speaker 2>banks that may impose a penalty. In the case of

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<v Speaker 2>investment grade bonds which carry a much lower risk. If

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<v Speaker 2>you hold it to maturity,

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<v Speaker 2>there is no default, you get your money back. But

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<v Speaker 2>in the interim, the value of the bond may fall

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<v Speaker 2>or rise depending on how interest rates play out during

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<v Speaker 2>that period. But in the case of unit trust, of course,

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<v Speaker 2>comes at risk. So not everything carries zero risk. So

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<v Speaker 1>even a safe haven asset may not be 100% safe. Now,

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<v Speaker 1>if I'm truly risk averse, then should I just stay

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<v Speaker 1>out of the market? Just keep my cash in the bank.

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<v Speaker 1>The safest investment is always cash. But you have to

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<v Speaker 1>ask the question of whether that money

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<v Speaker 1>the bank is actually still giving you the biggest bang

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<v Speaker 1>for the buck. Even though the fed has increased the

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<v Speaker 1>interest rates for a lot of banks, they may not

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<v Speaker 1>be able to pass through the whole benefits to the depositors. Also,

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<v Speaker 1>we're seeing what's happening in some smaller banks uh in

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<v Speaker 1>the US in terms of like S B B or

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<v Speaker 1>C bank. Even if you park your money in the bank,

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<v Speaker 1>you should ask yourself number one, am I getting like

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<v Speaker 1>the best return possible with similar risk? And secondly, make

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<v Speaker 1>sure you also do do diligence on your bank to

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<v Speaker 1>make sure it's safe.

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<v Speaker 1>And let's not forget about the impact that high inflation

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<v Speaker 1>has on cash. So what about another traditional safe haven asset?

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<v Speaker 1>Gold gold has been doing quite well last year even

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<v Speaker 1>though it did not have an absolute upside in terms

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<v Speaker 1>of return, at least it outperformed both bonds and equities

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<v Speaker 1>and it ended the year flat. Gold has rallied a lot.

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<v Speaker 1>It's up 7 to 8% in the first quarter. So

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<v Speaker 1>gold uh actually remains a very, very good safe haven asset.

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<v Speaker 1>And in all the statuary portfolios we've actually allocated significant

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<v Speaker 1>portion to gold, given it

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<v Speaker 1>protective nature. Bau do

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<v Speaker 2>you agree in the case of gold, it's been very

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<v Speaker 2>volatile in the last couple of years. If you look

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<v Speaker 2>at the price of gold, it's been extremely volatile. It's

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<v Speaker 2>done well in recent times over the last six months

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<v Speaker 2>or so. Partly because interest rates have come down sharply.

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<v Speaker 2>The US dollar has come down sharply and global uncertainties

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<v Speaker 2>have increased, For example, the banking crisis in the US

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<v Speaker 2>and Europe and that has increased the appeal of gold.

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<v Speaker 2>But having said that although gold is sometimes seen as

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<v Speaker 2>a safe haven, it is not completely safe in the

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<v Speaker 2>sense that the price

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<v Speaker 2>can fluctuate up and down and it can be volatile

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<v Speaker 2>depending on how interest rates and the US dollar and

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<v Speaker 2>global uncertainties play out. So for example, if risk appetite

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<v Speaker 2>returns to the market that will take the shine away

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<v Speaker 2>from gold and gold may not do as well in

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<v Speaker 2>such an environment.

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<v Speaker 1>So a lot depends on what the FED decides to

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<v Speaker 1>do with regards to the interest rates. Now, how will

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<v Speaker 1>that play out and impact gold?

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<v Speaker 2>Higher rates in the US will typically impact some safe

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<v Speaker 2>havens like gold negatively,

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<v Speaker 2>higher interest rates in the US will result in the

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<v Speaker 2>US dollar heading higher and that will make gold for example,

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<v Speaker 2>more expensive because it's an asset class is price in

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<v Speaker 2>US dollars. But on the flip side, what has happened

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<v Speaker 2>in the last six months is the US dollar has

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<v Speaker 2>weakened by about 10% or so. Essentially, the interest rates

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<v Speaker 2>in the US US treasury yields have also come down

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<v Speaker 2>quite significantly. And that has increased the appeal of gold

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<v Speaker 2>and resulted in gold prices actually going up.

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<v Speaker 2>Now, going forward, the outlook for interest rates is uncertain.

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<v Speaker 2>But you know, the general view appears to be that

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<v Speaker 2>interest rates are close to a peak.

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<v Speaker 2>And if we see a recession sometime in the next

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<v Speaker 2>12 to 18 months, central banks including the Federal Reserve

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<v Speaker 2>could cut interest rates and when the fed does that,

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<v Speaker 2>the US dollar will probably come down even more and

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<v Speaker 2>the appeal of gold will improve even more. So in

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<v Speaker 2>that respect, gold has more upside if you take a

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<v Speaker 2>view of, you know, 12 to 18 months. But along

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<v Speaker 2>the way, gold prices can go up and down and

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<v Speaker 2>can be quite volatile depending on fed rhetoric depending on

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<v Speaker 2>how interest rates play out over that period.

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<v Speaker 1>Just to recap, investors need to know that not all

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<v Speaker 1>Safe Haven assets come with zero risk. Traditional safe havens

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<v Speaker 1>like bonds did not do too well last year, but

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<v Speaker 1>look set to make a comeback in 2023. Another Star

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<v Speaker 1>Wars Safe Haven is gold which has been performing well

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<v Speaker 1>since November last year, but may be subject to price

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<v Speaker 1>fluctuations due to the Fed's interest rate policies

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<v Speaker 1>in this current environment. What's your advice for investors last year.

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<v Speaker 1>It was very, very tough to be a S allocator

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<v Speaker 1>because everything was expensive stocks. If you look at the

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<v Speaker 1>S and P, it was trading at 23 times bonds

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<v Speaker 1>by 10 year treasuries were yielded only 1.5%. So you're

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<v Speaker 1>not being very, very rewarded by taking risk in these

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<v Speaker 1>different asset classes. Now, fast forward to today, even though

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<v Speaker 1>we may face an imminent slowdown or even like talks

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<v Speaker 1>of recession in the US and elsewhere. I think actually

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<v Speaker 1>as an asset allocator, we see more opportunities particularly for

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<v Speaker 1>the long term. And that's because starting valuations have come

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<v Speaker 1>down quite a lot stocks. For example, if you look

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<v Speaker 1>at the S and P is now trading at 18 times,

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<v Speaker 1>which is not historically, very, very cheap, but at least

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<v Speaker 1>it's not expensive. It's around

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<v Speaker 1>kind of the historical average. And if I look at bonds,

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<v Speaker 1>10 year treasuries are yielding like 3.6%. So at least

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<v Speaker 1>compared to 18 months ago where it was only yielding 1.5%

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<v Speaker 1>it's much more attractive. So I think there are actually

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<v Speaker 1>more opportunities for us to diversify our portfolios this year.

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<v Speaker 1>As we head into potentially a US downturn or even

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<v Speaker 1>a recession, we need to think about two things.

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<v Speaker 1>Number one is the risk level of your investment for

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<v Speaker 1>investors uh with low risk tolerance or like shorter time frame.

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<v Speaker 1>I mean, think about the risk that you take in

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<v Speaker 1>your portfolio. Is it appropriate for that? For example, if

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<v Speaker 1>you have too much equities, I mean, now may be

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<v Speaker 1>a good time to think about adding uh some of

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<v Speaker 1>the more traditional safe haven assets. Uh Shorting

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<v Speaker 1>data treasuries is a very good place. Uh Goal is

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<v Speaker 1>also very good. And I think over the next few

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<v Speaker 1>months as the risk of uh recession grows bigger, then

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<v Speaker 1>I mean, longer data treasuries may start to perform better

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<v Speaker 1>as well. So that's more on the risk management side.

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<v Speaker 1>The other side of thinking about your portfolio is also

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<v Speaker 1>to keep a diversified portfolio.

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<v Speaker 1>And this becomes particularly important as us slows down. When

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<v Speaker 1>we look at global opportunities, actually, we see that there

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<v Speaker 1>are some divergences in the economic cycle. For example, China

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<v Speaker 1>is actually recovering from a economic downturn in contrast with

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<v Speaker 1>the US entering a downturn. So adding some Chinese assets

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<v Speaker 1>or emerging market assets, I mean, actually may help to

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<v Speaker 1>balance out the

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<v Speaker 1>in your US based investments.

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<v Speaker 2>The traditional word safe haven gives you an impression that

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<v Speaker 2>you can only buy one or two asset classes that

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<v Speaker 2>are completely safe where returns are guaranteed, where capital is guaranteed,

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<v Speaker 2>given the current volatile market and given the sharp draw

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<v Speaker 2>down in the markets that we saw in 2022 opportunities

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<v Speaker 2>are starting to arise, but it it will be there

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<v Speaker 2>for investors with a medium term view of the market.

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<v Speaker 2>And the way you manage risk in a market like

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<v Speaker 2>this is essentially keep a diversified portfolio, put your money

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<v Speaker 2>into perhaps funds asset classes that will not see a

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<v Speaker 2>big drawdown if something major happens to the markets and

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<v Speaker 2>also spread your investments out over time. In other words,

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<v Speaker 2>buy gradually, do not try and time the markets and

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<v Speaker 2>throw all your money into the market at a certain

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<v Speaker 2>point in time.

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<v Speaker 2>And that's another way to invest in the markets in

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<v Speaker 2>a safer way. It is not completely safe haven as

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<v Speaker 2>in like it is not foolproof, but nevertheless, a method

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<v Speaker 2>like this allows you to manage your risk. Because in

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<v Speaker 2>the next 12 to 18 months, if the fed does

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<v Speaker 2>cut interest rates and we go past a recession which

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<v Speaker 2>could hit us in the next 12, 18 months, then

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<v Speaker 2>the outlook for the markets will look a lot better,

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<v Speaker 2>especially if inflation comes down, interest rates come down, economies

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<v Speaker 2>start rebounding. And if you gradually position yourself in the markets,

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<v Speaker 2>you could actually end up getting decent returns. So dollar

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<v Speaker 2>cost averaging, taking a diversified approach to investments, diversifying your

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<v Speaker 2>investments through vehicles like unit trust, for example, may be

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<v Speaker 2>different ways for you to actually manage risks and to

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<v Speaker 2>invest in a safer way in the

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<v Speaker 1>markets. So the best safe haven is actually managing risks safely.

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<v Speaker 1>What are the top two risks that investors should be

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<v Speaker 1>paying more attention to

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<v Speaker 2>the number one risk in the market right now is inflation.

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<v Speaker 2>The markets are very focused on inflation because that drives

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<v Speaker 2>the hands of the FED. The FED has resisted cutting

0:11:41.159 --> 0:11:44.130
<v Speaker 2>interest rates because it feels that inflation is still high.

0:11:44.380 --> 0:11:47.409
<v Speaker 2>But if inflation comes down in a meaningful way, then

0:11:47.419 --> 0:11:51.319
<v Speaker 2>there's room for the fed to cut interest rates. And historically,

0:11:51.330 --> 0:11:52.460
<v Speaker 2>when interest rates are cut,

0:11:52.880 --> 0:11:55.250
<v Speaker 2>that is good news for equity investors. It's good news

0:11:55.260 --> 0:11:58.400
<v Speaker 2>for bond investors. We are not there yet but investors

0:11:58.409 --> 0:12:00.369
<v Speaker 2>are keeping a very close eye on inflation numbers in

0:12:00.380 --> 0:12:03.710
<v Speaker 2>the US to see how that plays out because it

0:12:03.719 --> 0:12:06.270
<v Speaker 2>has a big impact on us, interest rates and US

0:12:06.280 --> 0:12:09.978
<v Speaker 2>monetary policy. Now the second big risk that markets are

0:12:09.989 --> 0:12:12.699
<v Speaker 2>also worried about at the back of their minds, it

0:12:12.710 --> 0:12:15.780
<v Speaker 2>does not emerge to the forefront is recession risk because

0:12:15.789 --> 0:12:18.309
<v Speaker 2>interest rates in the US have gone up 5% in

0:12:18.320 --> 0:12:19.549
<v Speaker 2>a very short period of time.

0:12:19.940 --> 0:12:21.650
<v Speaker 2>And we've seen the impact of some of that come

0:12:21.659 --> 0:12:24.729
<v Speaker 2>through in the banking crisis in the US recently. So,

0:12:24.780 --> 0:12:27.320
<v Speaker 2>you know, the markets are worried that that sharp increase

0:12:27.330 --> 0:12:30.869
<v Speaker 2>in interest rates could hurt the corporate sector, could hurt consumers,

0:12:30.880 --> 0:12:33.270
<v Speaker 2>could hurt the economy and eventually cause the US to

0:12:33.280 --> 0:12:36.330
<v Speaker 2>slip into a recession. Now the US slips into a recession,

0:12:36.530 --> 0:12:39.848
<v Speaker 2>that means that the earnings estimates of analysts will be

0:12:39.859 --> 0:12:40.829
<v Speaker 2>taken down further

0:12:41.159 --> 0:12:43.900
<v Speaker 2>and uh that could weigh on the stock markets as well.

0:12:44.010 --> 0:12:47.098
<v Speaker 2>But again, we see a recession as possible in the

0:12:47.109 --> 0:12:48.919
<v Speaker 2>second half of this year and the US, but we

0:12:48.929 --> 0:12:51.909
<v Speaker 2>see a shallow recession and typically when the market emerges

0:12:51.919 --> 0:12:54.770
<v Speaker 2>from a recession and interest rates are cut equities and

0:12:54.780 --> 0:12:58.819
<v Speaker 2>bonds tend to do fairly well. So investors shouldn't be

0:12:58.869 --> 0:13:02.809
<v Speaker 2>overly consumed by some of the head winds and risks

0:13:02.820 --> 0:13:05.340
<v Speaker 2>that they see right now. Some of that head winds

0:13:05.349 --> 0:13:08.690
<v Speaker 2>and risk actually are like a two sided coin. They

0:13:08.700 --> 0:13:09.590
<v Speaker 2>come with risk

0:13:09.950 --> 0:13:14.390
<v Speaker 2>and they also offer opportunities for investors with the risk appetite,

0:13:14.400 --> 0:13:17.900
<v Speaker 2>but who are prepared to hold for perhaps a 2

0:13:17.909 --> 0:13:18.809
<v Speaker 2>to 3 year period?

0:13:19.080 --> 0:13:22.439
<v Speaker 1>Last question to you, Stephanie with all these risks out there,

0:13:22.450 --> 0:13:26.059
<v Speaker 1>should investors stick to the 60 40 portfolio allocation?

0:13:26.500 --> 0:13:30.299
<v Speaker 1>Depends on your time horizon and risk tolerance. Bonds and

0:13:30.309 --> 0:13:34.830
<v Speaker 1>equities are the biggest asset classes globally. And asset classes

0:13:34.840 --> 0:13:37.869
<v Speaker 1>have a common characteristic which is that they would go

0:13:37.880 --> 0:13:40.530
<v Speaker 1>up over time. So for example, us, stocks have returned

0:13:40.539 --> 0:13:43.569
<v Speaker 1>about 10% per year in the past 50 years. I

0:13:43.580 --> 0:13:46.659
<v Speaker 1>mean bonds have returned like also mid single digit during

0:13:46.669 --> 0:13:47.330
<v Speaker 1>the same period.

0:13:47.630 --> 0:13:49.849
<v Speaker 1>So if you hold these things kind of long enough,

0:13:49.859 --> 0:13:53.049
<v Speaker 1>you would reap the benefit of long term investing returns

0:13:53.059 --> 0:13:56.130
<v Speaker 1>and also compounding as well. So for long term investors,

0:13:56.140 --> 0:13:58.979
<v Speaker 1>I think it's ok to hold on to 60 40.

0:13:59.059 --> 0:14:01.869
<v Speaker 1>The other aspect of this is that even though over

0:14:01.880 --> 0:14:03.549
<v Speaker 1>the long term, I mean, these things tend to go

0:14:03.559 --> 0:14:06.789
<v Speaker 1>up in the short term they would face volatility as well.

0:14:06.799 --> 0:14:08.229
<v Speaker 1>There are like drawdowns

0:14:08.479 --> 0:14:11.979
<v Speaker 1>and I think what we experienced in 2022 was an

0:14:11.989 --> 0:14:16.010
<v Speaker 1>inflation led drawdown which kind of impacted both as a classes.

0:14:16.030 --> 0:14:18.909
<v Speaker 1>Most of the time equities would tend to have more drawdown.

0:14:18.919 --> 0:14:21.809
<v Speaker 1>But 2022 was a quite extraordinary year.

0:14:22.119 --> 0:14:25.890
<v Speaker 1>Inflation fear should start to abate over the coming months.

0:14:25.900 --> 0:14:27.960
<v Speaker 1>So I mean that should help the bond portion of

0:14:27.969 --> 0:14:32.010
<v Speaker 1>the 60 40. In addition, investors apart from 60 40

0:14:32.020 --> 0:14:34.700
<v Speaker 1>may think about to that uh a little bit or

0:14:34.710 --> 0:14:37.409
<v Speaker 1>adding some other asset classes I mentioned goal which is

0:14:37.419 --> 0:14:40.710
<v Speaker 1>a very good addition to a traditional 60 40. The

0:14:40.739 --> 0:14:41.520
<v Speaker 1>that way

0:14:41.684 --> 0:14:45.354
<v Speaker 1>try to introduce uh other asset classes as well, for example,

0:14:45.364 --> 0:14:49.205
<v Speaker 1>emerging markets or like uh international equities. So those are

0:14:49.215 --> 0:14:53.195
<v Speaker 1>good additions to a very traditional uh 60 40 portfolio.

0:14:53.294 --> 0:14:57.494
<v Speaker 1>And remember 60 40 is a particular risk level. So

0:14:57.505 --> 0:14:59.835
<v Speaker 1>if let's say, I mean, you're closer to retirement, 60

0:14:59.844 --> 0:15:01.174
<v Speaker 1>40 may not be for you,

0:15:02.179 --> 0:15:05.479
<v Speaker 1>right? Some sound advice there. So just to recap, safe

0:15:05.489 --> 0:15:08.979
<v Speaker 1>Haven doesn't mean zero risk. And we saw that happening

0:15:08.989 --> 0:15:12.080
<v Speaker 1>with both bonds and gold last year, but they do

0:15:12.090 --> 0:15:14.919
<v Speaker 1>look set to make a comeback in 2023 though

0:15:15.869 --> 0:15:19.559
<v Speaker 1>the biggest headwinds for investors this year will be inflation

0:15:19.570 --> 0:15:22.450
<v Speaker 1>and a possible recession. So you need to think about

0:15:22.460 --> 0:15:26.169
<v Speaker 1>the risk you're taking in your investment portfolio. The best

0:15:26.179 --> 0:15:30.250
<v Speaker 1>Safe Haven is to have safer investing strategies such as

0:15:30.260 --> 0:15:34.609
<v Speaker 1>dollar cost averaging and diversifying your portfolio. And that includes

0:15:34.619 --> 0:15:39.299
<v Speaker 1>taking advantage of divergences when some economies grow faster than others.

0:15:39.669 --> 0:15:43.039
<v Speaker 1>And finally, it's important to know your risk profile and

0:15:43.049 --> 0:15:47.289
<v Speaker 1>not just follow the traditional 60 40 portfolio allocation blindly.

0:15:47.719 --> 0:15:50.239
<v Speaker 1>And that's the five things you need to know about

0:15:50.250 --> 0:15:53.950
<v Speaker 1>safe haven investments. My thanks to my guest, Stephanie Leong,

0:15:53.960 --> 0:15:57.780
<v Speaker 1>Chief Investment Officer at Stash Away and Vasu Menon, Executive

0:15:57.789 --> 0:16:01.869
<v Speaker 1>Director of Investment Strategy at O CBC Bank, Catch Money

0:16:01.880 --> 0:16:04.710
<v Speaker 1>Mind on C N A and online at me, watch

0:16:04.719 --> 0:16:07.070
<v Speaker 1>C N A dot Asia and youtube.