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Fixed income, gold offer safe haven from declines

David Bassanese
By Sarah Kendell
28 August 2019 — 1 minute read

Investors nervous about ongoing sharemarket volatility can look to fixed income, gold and short exposures to shore up their portfolio from possible further declines, according to a leading economist.

In a recent blog, Betashares chief economist David Bassanese said while he believed markets were currently a long way from crisis point, there were several options available for investors seeking short-term hedges against declines in equities.

“For those wishing to reduce downside risk in the case of ‘doomsday’ scenarios, it’s a good idea to seek investments that may perform well when equities do badly,” he said.

“In the current market environment, three investments worthy of consideration are short funds, gold and government bonds.”

Mr Bassanese said funds providing short exposure to the equity market offered negative correlation to sharemarket returns over time; however, these were best used for short-term tactical portfolio weightings.

“Note that given equity markets tend to trend up over time, returns from short funds are more likely to turn negative the longer they are held.

“Therefore, the appropriateness of holding a short fund should be reviewed frequently.”

Mr Bassanese added that gold had become another popular hedge for investors in recent months, given rising prices and less attractive returns from more traditional sources of capital protection.

“Even in today’s low-inflation environment, gold has tended to rise in periods of equity market weakness, as such ‘risk-off’ periods have been associated with heightened expectations of even more global monetary stimulus and currency instability,” he said.

“Today’s low interest rates have also generally reduced the opportunity cost of maintaining some exposure to gold within portfolios.”

Mr Bassanese said government bonds also offered a safe haven for investors, as the likelihood of further interest rate cuts in Australia in particular was likely to boost the value of fixed rate bonds in the medium term.

“Due to slowing in Australian economic growth over the coming year, I anticipate the Reserve Bank will cut official interest rates from the already low rate of 1 per cent to 0.5 [of a percentage point] by February next year,” he said.  

“What’s more, the RBA could well also engage in some form of local quantitative easing if need be, which would involve actively buying government and corporate bonds in the market to drive down longer-term bond yields even further.

“Both these scenarios are even more likely in a ‘doomsday’ environment, which would likely further bolster the return from government bond exposures.”


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