While some investors worried about the growing tension between the US and North Korea have been busy driving up the price of gold, deVere Group strategist Tom Elliott has another idea: make sure your investments “remain diversified”.
Elliott made his comments as a series of threatening remarks between US President Donald Trump and North Korean leader Kim Jong-un sent the price of gold soaring to its highest weekly closing price last Friday, of US$1284.40 an ounce, since last November, before Donald Trump was elected.
Sales of so-called defensive assets – such as infrastructure funds, debt securities, government bonds and equity income funds, and certain currencies, such as the Swiss franc – were also reported to have increased in response to investor concerns over the geo-political mood, while global stock markets, which had been soaring until the threats began, fell back.
The VIX index, a measure of the volatility of S&P 500 index options that’s typically referred to as the “fear index”, meanwhile, jumped to a three-month high of more than 15.
‘Not a cue to sell’
For investors, the recent war of words between Trump and Kim was a reminder, Elliott noted, of the importance in “remain[ing] diversified in our investing habits” – and was most definitely not, he stressed, a cue for anyone to embark on a round of panic selling.
“Too often, we find ourselves selling at the moment of highest fear, only to be out of the market as a rebound in stock market prices takes place as tensions wind down,” he said.
Indeed, he noted, it’s times like these that typically showcase exactly why a shrewd long-term investor, keen to maximise returns while keeping portfolio volatility low, always makes a point of holding at least some “core government bonds” in their asset mix, as part of a balanced portfolio.
“Exposure to the Swiss franc and Japanese yen perhaps best comes through ownership of global stock and bond market funds, or through currency liquidity funds,” Elliot continued.
“A global stock market fund will have its fair share of value and growth companies, unlike – say – the FTSE 100 index, which is predominately value-orientated, with its bias towards energy, mining and financial, or the Japanese TOPIX, which is growth-orientated, with a predominance of consumer goods companies.
“In all likelihood, the North Korea problem will persist for years to come, with the US and, increasingly, China attempting to contain and restrain Kim Jong-un. He [Kim] knows that any use of missiles – nuclear-tipped or not – against the US or one of its Asian allies, risks a retaliation that will lead to the end of his family’s rule of the country.
“Therefore, there is a high probability that the current tension will ease off, and the recent flight into defensive stocks will reverse.”
Nevertheless, Elliott suggests investors keep hold of those defensive assets, just in case.
“It is not just North Korea that has the potential to surprise investors. Whether it is a credit crunch in China, policy error from the Fed, or fear of an over-valued US stock market, there are many reasons to maintain a balanced multi-asset portfolio that has exposure to defensive asset classes and currencies.”
Based in Dubai, with a global network of more than 70 offices, the privately-held deVere Group
has more than 80,000 clients and around US$12bn under advisement.