Speaker 1: Hello and welcome. What's the safest safe haven investment right now?
Speaker 1: That's a question that many investors are asking as we
Speaker 1: see the economic turmoil of 2022 continuing to the first
Speaker 1: quarter of 2023. I'm Jonathan Piri from the money Mind
Speaker 1: team and we're looking at the five things you need
Speaker 1: to know about safe haven investments. Joining me today are
Speaker 1: Stephanie Leong, chief Investment Officer at Stash Away and Vasu Menon,
Speaker 1: Executive Director of Investment Strategy at O CBC Bank.
Speaker 1: Now let's get started with a definition of safe haven.
Speaker 1: They are investments that traditionally offer investors protection in the
Speaker 1: event of market downturns. Recent events such as the banking
Speaker 1: crisis in the US and Europe. And a rise in
Speaker 1: tensions between the US and China have led to a
Speaker 1: flight to safety by investors given this backdrop are traditional
Speaker 1: safe havens. Still the safest place to put your money. Stephanie,
Speaker 1: if we think about traditional safe havens,
Speaker 1: typically we think about bond and maybe go and a
Speaker 1: very traditional way of doing asset allocation is something called
Speaker 1: the 60 40. Basically, you have 60% of your investments
Speaker 1: into stocks and 40% into bond, the 60 40 portfolio
Speaker 1: actually has not been doing well in 2022 at all. Indeed,
Speaker 1: it fell by 18%. So which means that actually bonds
Speaker 1: did not provide the
Speaker 1: protective characteristic that it was supposed to do in 2022.
Speaker 1: And there was a particular reason for that inflation has
Speaker 1: been rearing its head across developed markets and, and particularly
Speaker 1: in the US that resulted in the fed hiking interest
Speaker 1: rates very aggressively. If we look at the pace of
Speaker 1: the fed's interest rate hikes in 2022 it was historically
Speaker 1: one of the fastest rate hike cycles that we've experienced.
Speaker 1: So with interest rates rising so quickly, bond prices actually
Speaker 1: fell a lot. So last year, if you were invested
Speaker 1: into bonds, you would have lost money and actually in
Speaker 1: some loan two as stocks
Speaker 1: now, does that mean bond is no longer a safe
Speaker 1: haven asset? We think that looking forward that may change
Speaker 1: because if we look at recent inflation data, although the
Speaker 1: absolute level of reading is still quite high inflation is
Speaker 1: starting to come off and we will expect given the
Speaker 1: tightening that has been going on, we think inflation will
Speaker 1: actually further cool down in the coming months, which means
Speaker 1: that actually bonds may be able to perform better going forward.
Speaker 1: Vasu do you agree that bonds remain a good safe
Speaker 1: haven asset
Speaker 2: investment. Great Bond
Speaker 2: are bonds with higher credit rating in the interim before
Speaker 2: the maturity of the bond. If interest rates move up
Speaker 2: and down, it can affect the capital value of the bonds.
Speaker 2: But if you hold the maturity and there's no default
Speaker 2: or minimal default risk that you get your capital back
Speaker 2: and along the way, you are able to clip coupon
Speaker 2: as well. Not all safe havens carry zero risk. Some
Speaker 2: of them may involve a case where prices can fall
Speaker 2: in the short term. But typically if you hold them
Speaker 2: to maturity for investment rate bonds or treasury bills or
Speaker 2: fixed deposits, the risk
Speaker 2: is minimal. For example, in the case of treasury bills,
Speaker 2: if you buy a six month treasury bill, it can
Speaker 2: offer you a decent yield of more than 3% based
Speaker 2: on the current pricing. But if you get out of
Speaker 2: the treasury bill before it matures, you could incur losses.
Speaker 2: So similarly, in the case of fixed deposits, if you
Speaker 2: get out too early, it's possible that you lose interest
Speaker 2: or perhaps even a penalty. In the case of some
Speaker 2: banks that may impose a penalty. In the case of
Speaker 2: investment grade bonds which carry a much lower risk. If
Speaker 2: you hold it to maturity,
Speaker 2: there is no default, you get your money back. But
Speaker 2: in the interim, the value of the bond may fall
Speaker 2: or rise depending on how interest rates play out during
Speaker 2: that period. But in the case of unit trust, of course,
Speaker 2: comes at risk. So not everything carries zero risk. So
Speaker 1: even a safe haven asset may not be 100% safe. Now,
Speaker 1: if I'm truly risk averse, then should I just stay
Speaker 1: out of the market? Just keep my cash in the bank.
Speaker 1: The safest investment is always cash. But you have to
Speaker 1: ask the question of whether that money
Speaker 1: the bank is actually still giving you the biggest bang
Speaker 1: for the buck. Even though the fed has increased the
Speaker 1: interest rates for a lot of banks, they may not
Speaker 1: be able to pass through the whole benefits to the depositors. Also,
Speaker 1: we're seeing what's happening in some smaller banks uh in
Speaker 1: the US in terms of like S B B or
Speaker 1: C bank. Even if you park your money in the bank,
Speaker 1: you should ask yourself number one, am I getting like
Speaker 1: the best return possible with similar risk? And secondly, make
Speaker 1: sure you also do do diligence on your bank to
Speaker 1: make sure it's safe.
Speaker 1: And let's not forget about the impact that high inflation
Speaker 1: has on cash. So what about another traditional safe haven asset?
Speaker 1: Gold gold has been doing quite well last year even
Speaker 1: though it did not have an absolute upside in terms
Speaker 1: of return, at least it outperformed both bonds and equities
Speaker 1: and it ended the year flat. Gold has rallied a lot.
Speaker 1: It's up 7 to 8% in the first quarter. So
Speaker 1: gold uh actually remains a very, very good safe haven asset.
Speaker 1: And in all the statuary portfolios we've actually allocated significant
Speaker 1: portion to gold, given it
Speaker 1: protective nature. Bau do
Speaker 2: you agree in the case of gold, it's been very
Speaker 2: volatile in the last couple of years. If you look
Speaker 2: at the price of gold, it's been extremely volatile. It's
Speaker 2: done well in recent times over the last six months
Speaker 2: or so. Partly because interest rates have come down sharply.
Speaker 2: The US dollar has come down sharply and global uncertainties
Speaker 2: have increased, For example, the banking crisis in the US
Speaker 2: and Europe and that has increased the appeal of gold.
Speaker 2: But having said that although gold is sometimes seen as
Speaker 2: a safe haven, it is not completely safe in the
Speaker 2: sense that the price
Speaker 2: can fluctuate up and down and it can be volatile
Speaker 2: depending on how interest rates and the US dollar and
Speaker 2: global uncertainties play out. So for example, if risk appetite
Speaker 2: returns to the market that will take the shine away
Speaker 2: from gold and gold may not do as well in
Speaker 2: such an environment.
Speaker 1: So a lot depends on what the FED decides to
Speaker 1: do with regards to the interest rates. Now, how will
Speaker 1: that play out and impact gold?
Speaker 2: Higher rates in the US will typically impact some safe
Speaker 2: havens like gold negatively,
Speaker 2: higher interest rates in the US will result in the
Speaker 2: US dollar heading higher and that will make gold for example,
Speaker 2: more expensive because it's an asset class is price in
Speaker 2: US dollars. But on the flip side, what has happened
Speaker 2: in the last six months is the US dollar has
Speaker 2: weakened by about 10% or so. Essentially, the interest rates
Speaker 2: in the US US treasury yields have also come down
Speaker 2: quite significantly. And that has increased the appeal of gold
Speaker 2: and resulted in gold prices actually going up.
Speaker 2: Now, going forward, the outlook for interest rates is uncertain.
Speaker 2: But you know, the general view appears to be that
Speaker 2: interest rates are close to a peak.
Speaker 2: And if we see a recession sometime in the next
Speaker 2: 12 to 18 months, central banks including the Federal Reserve
Speaker 2: could cut interest rates and when the fed does that,
Speaker 2: the US dollar will probably come down even more and
Speaker 2: the appeal of gold will improve even more. So in
Speaker 2: that respect, gold has more upside if you take a
Speaker 2: view of, you know, 12 to 18 months. But along
Speaker 2: the way, gold prices can go up and down and
Speaker 2: can be quite volatile depending on fed rhetoric depending on
Speaker 2: how interest rates play out over that period.
Speaker 1: Just to recap, investors need to know that not all
Speaker 1: Safe Haven assets come with zero risk. Traditional safe havens
Speaker 1: like bonds did not do too well last year, but
Speaker 1: look set to make a comeback in 2023. Another Star
Speaker 1: Wars Safe Haven is gold which has been performing well
Speaker 1: since November last year, but may be subject to price
Speaker 1: fluctuations due to the Fed's interest rate policies
Speaker 1: in this current environment. What's your advice for investors last year.
Speaker 1: It was very, very tough to be a S allocator
Speaker 1: because everything was expensive stocks. If you look at the
Speaker 1: S and P, it was trading at 23 times bonds
Speaker 1: by 10 year treasuries were yielded only 1.5%. So you're
Speaker 1: not being very, very rewarded by taking risk in these
Speaker 1: different asset classes. Now, fast forward to today, even though
Speaker 1: we may face an imminent slowdown or even like talks
Speaker 1: of recession in the US and elsewhere. I think actually
Speaker 1: as an asset allocator, we see more opportunities particularly for
Speaker 1: the long term. And that's because starting valuations have come
Speaker 1: down quite a lot stocks. For example, if you look
Speaker 1: at the S and P is now trading at 18 times,
Speaker 1: which is not historically, very, very cheap, but at least
Speaker 1: it's not expensive. It's around
Speaker 1: kind of the historical average. And if I look at bonds,
Speaker 1: 10 year treasuries are yielding like 3.6%. So at least
Speaker 1: compared to 18 months ago where it was only yielding 1.5%
Speaker 1: it's much more attractive. So I think there are actually
Speaker 1: more opportunities for us to diversify our portfolios this year.
Speaker 1: As we head into potentially a US downturn or even
Speaker 1: a recession, we need to think about two things.
Speaker 1: Number one is the risk level of your investment for
Speaker 1: investors uh with low risk tolerance or like shorter time frame.
Speaker 1: I mean, think about the risk that you take in
Speaker 1: your portfolio. Is it appropriate for that? For example, if
Speaker 1: you have too much equities, I mean, now may be
Speaker 1: a good time to think about adding uh some of
Speaker 1: the more traditional safe haven assets. Uh Shorting
Speaker 1: data treasuries is a very good place. Uh Goal is
Speaker 1: also very good. And I think over the next few
Speaker 1: months as the risk of uh recession grows bigger, then
Speaker 1: I mean, longer data treasuries may start to perform better
Speaker 1: as well. So that's more on the risk management side.
Speaker 1: The other side of thinking about your portfolio is also
Speaker 1: to keep a diversified portfolio.
Speaker 1: And this becomes particularly important as us slows down. When
Speaker 1: we look at global opportunities, actually, we see that there
Speaker 1: are some divergences in the economic cycle. For example, China
Speaker 1: is actually recovering from a economic downturn in contrast with
Speaker 1: the US entering a downturn. So adding some Chinese assets
Speaker 1: or emerging market assets, I mean, actually may help to
Speaker 1: balance out the
Speaker 1: in your US based investments.
Speaker 2: The traditional word safe haven gives you an impression that
Speaker 2: you can only buy one or two asset classes that
Speaker 2: are completely safe where returns are guaranteed, where capital is guaranteed,
Speaker 2: given the current volatile market and given the sharp draw
Speaker 2: down in the markets that we saw in 2022 opportunities
Speaker 2: are starting to arise, but it it will be there
Speaker 2: for investors with a medium term view of the market.
Speaker 2: And the way you manage risk in a market like
Speaker 2: this is essentially keep a diversified portfolio, put your money
Speaker 2: into perhaps funds asset classes that will not see a
Speaker 2: big drawdown if something major happens to the markets and
Speaker 2: also spread your investments out over time. In other words,
Speaker 2: buy gradually, do not try and time the markets and
Speaker 2: throw all your money into the market at a certain
Speaker 2: point in time.
Speaker 2: And that's another way to invest in the markets in
Speaker 2: a safer way. It is not completely safe haven as
Speaker 2: in like it is not foolproof, but nevertheless, a method
Speaker 2: like this allows you to manage your risk. Because in
Speaker 2: the next 12 to 18 months, if the fed does
Speaker 2: cut interest rates and we go past a recession which
Speaker 2: could hit us in the next 12, 18 months, then
Speaker 2: the outlook for the markets will look a lot better,
Speaker 2: especially if inflation comes down, interest rates come down, economies
Speaker 2: start rebounding. And if you gradually position yourself in the markets,
Speaker 2: you could actually end up getting decent returns. So dollar
Speaker 2: cost averaging, taking a diversified approach to investments, diversifying your
Speaker 2: investments through vehicles like unit trust, for example, may be
Speaker 2: different ways for you to actually manage risks and to
Speaker 2: invest in a safer way in the
Speaker 1: markets. So the best safe haven is actually managing risks safely.
Speaker 1: What are the top two risks that investors should be
Speaker 1: paying more attention to
Speaker 2: the number one risk in the market right now is inflation.
Speaker 2: The markets are very focused on inflation because that drives
Speaker 2: the hands of the FED. The FED has resisted cutting
Speaker 2: interest rates because it feels that inflation is still high.
Speaker 2: But if inflation comes down in a meaningful way, then
Speaker 2: there's room for the fed to cut interest rates. And historically,
Speaker 2: when interest rates are cut,
Speaker 2: that is good news for equity investors. It's good news
Speaker 2: for bond investors. We are not there yet but investors
Speaker 2: are keeping a very close eye on inflation numbers in
Speaker 2: the US to see how that plays out because it
Speaker 2: has a big impact on us, interest rates and US
Speaker 2: monetary policy. Now the second big risk that markets are
Speaker 2: also worried about at the back of their minds, it
Speaker 2: does not emerge to the forefront is recession risk because
Speaker 2: interest rates in the US have gone up 5% in
Speaker 2: a very short period of time.
Speaker 2: And we've seen the impact of some of that come
Speaker 2: through in the banking crisis in the US recently. So,
Speaker 2: you know, the markets are worried that that sharp increase
Speaker 2: in interest rates could hurt the corporate sector, could hurt consumers,
Speaker 2: could hurt the economy and eventually cause the US to
Speaker 2: slip into a recession. Now the US slips into a recession,
Speaker 2: that means that the earnings estimates of analysts will be
Speaker 2: taken down further
Speaker 2: and uh that could weigh on the stock markets as well.
Speaker 2: But again, we see a recession as possible in the
Speaker 2: second half of this year and the US, but we
Speaker 2: see a shallow recession and typically when the market emerges
Speaker 2: from a recession and interest rates are cut equities and
Speaker 2: bonds tend to do fairly well. So investors shouldn't be
Speaker 2: overly consumed by some of the head winds and risks
Speaker 2: that they see right now. Some of that head winds
Speaker 2: and risk actually are like a two sided coin. They
Speaker 2: come with risk
Speaker 2: and they also offer opportunities for investors with the risk appetite,
Speaker 2: but who are prepared to hold for perhaps a 2
Speaker 2: to 3 year period?
Speaker 1: Last question to you, Stephanie with all these risks out there,
Speaker 1: should investors stick to the 60 40 portfolio allocation?
Speaker 1: Depends on your time horizon and risk tolerance. Bonds and
Speaker 1: equities are the biggest asset classes globally. And asset classes
Speaker 1: have a common characteristic which is that they would go
Speaker 1: up over time. So for example, us, stocks have returned
Speaker 1: about 10% per year in the past 50 years. I
Speaker 1: mean bonds have returned like also mid single digit during
Speaker 1: the same period.
Speaker 1: So if you hold these things kind of long enough,
Speaker 1: you would reap the benefit of long term investing returns
Speaker 1: and also compounding as well. So for long term investors,
Speaker 1: I think it's ok to hold on to 60 40.
Speaker 1: The other aspect of this is that even though over
Speaker 1: the long term, I mean, these things tend to go
Speaker 1: up in the short term they would face volatility as well.
Speaker 1: There are like drawdowns
Speaker 1: and I think what we experienced in 2022 was an
Speaker 1: inflation led drawdown which kind of impacted both as a classes.
Speaker 1: Most of the time equities would tend to have more drawdown.
Speaker 1: But 2022 was a quite extraordinary year.
Speaker 1: Inflation fear should start to abate over the coming months.
Speaker 1: So I mean that should help the bond portion of
Speaker 1: the 60 40. In addition, investors apart from 60 40
Speaker 1: may think about to that uh a little bit or
Speaker 1: adding some other asset classes I mentioned goal which is
Speaker 1: a very good addition to a traditional 60 40. The
Speaker 1: that way
Speaker 1: try to introduce uh other asset classes as well, for example,
Speaker 1: emerging markets or like uh international equities. So those are
Speaker 1: good additions to a very traditional uh 60 40 portfolio.
Speaker 1: And remember 60 40 is a particular risk level. So
Speaker 1: if let's say, I mean, you're closer to retirement, 60
Speaker 1: 40 may not be for you,
Speaker 1: right? Some sound advice there. So just to recap, safe
Speaker 1: Haven doesn't mean zero risk. And we saw that happening
Speaker 1: with both bonds and gold last year, but they do
Speaker 1: look set to make a comeback in 2023 though
Speaker 1: the biggest headwinds for investors this year will be inflation
Speaker 1: and a possible recession. So you need to think about
Speaker 1: the risk you're taking in your investment portfolio. The best
Speaker 1: Safe Haven is to have safer investing strategies such as
Speaker 1: dollar cost averaging and diversifying your portfolio. And that includes
Speaker 1: taking advantage of divergences when some economies grow faster than others.
Speaker 1: And finally, it's important to know your risk profile and
Speaker 1: not just follow the traditional 60 40 portfolio allocation blindly.
Speaker 1: And that's the five things you need to know about
Speaker 1: safe haven investments. My thanks to my guest, Stephanie Leong,
Speaker 1: Chief Investment Officer at Stash Away and Vasu Menon, Executive
Speaker 1: Director of Investment Strategy at O CBC Bank, Catch Money
Speaker 1: Mind on C N A and online at me, watch
Speaker 1: C N A dot Asia and youtube.