Amidst a recent escalation in geopolitical tensions in the Middle East and following a year of positive returns across most asset classes, investors are increasingly looking for safe havens to hedge against downside and upside risks.
In this interview, Sergi Biosca, portfolio manager and fund selector at Caja Ingenieros, speaks to Eugenia Jiménez about the hedges and "safe havens" - if such a thing exists in the current climate - he is currently choosing.
Are you like to seek out gold or other hedges against risk more in 2020 than you did in 2019?
While it is true that we expect a slight improvement in terms of growth compared to 2019, we are aware of the high degree of uncertainty in the geopolitical environment, in addition to the phase of the economic cycle in which we are. Therefore, it is very important to understand each moment, which are the main risks, and how they can affect the market. For these reason, as we move forward in the course of the cycle, we prefer increasing defensive positions and hedges, including duration, gold and dollar.
Do you advise on or have exposure to gold yourself?
Yes, we are active in the search for funds that consider gold as part of their asset allocation. We currently maintain exposure in multi-active funds where gold is part of their asset allocation.
Given the performance of most asset classes through 2019, would you expect any to give up gains made, and if so, what does that imply for allocation?
We're aware of both, the phase of the cycle in which we find ourselves , and the performance of the assets during 2019. However, in a 12-month outlook, we maintain a slight overweight on equity. Why? Because better economic and financial conditions, a low inflation environment, and the reduction of tail risks, create a good environment for equity assets in 2020. However, we remain cautious as there are still risks on the horizon (US Elections, Trade War, China's economy, Brexit, etc.).
In that sense, within equity assets, we seek defensive approaches, which allow us to maintain the level of exposure but with a controlled level of risk. We like sectors such as real estate, infrastructure, healthcare and companies focused on sustainability and climate change. On the other hand, we maintain our negative view on credit, given the unattractive risk return profile.
Finally, one of our objectives is to increase the resilience of our portfolios, and do it with the lowest cost. In that sense we introduce hedges such as US Treasury Bonds and US Dollar. Regarding the latter, although it is overvalued in terms of PPP, it's an anti-cyclical currency that tends to benefit most if the economic environment deteriorates.
What other ways can investors increase their ability to withstand market downturns from short term risk associated with the Middle East and other geopolitical challenges?
It is important to note that each crisis is different, and safe heaven assets can perform differently depending on the factors that affect them. For this reason, we must be aware which are the factors that could deteriorate growth and select those assets that can benefit most. Just as an example, it has been during the post-2000 corrections that US Treasury bonds have performed well. During the previous drawdowns, the returns on the treasury market was mixed, and during the periods of Black Monday and Gulf War returns were negative. To sum up, it's important to know what are the factors that affect the different assets and select those assets that can perform better depending on economic environment.
In the current macro environment of low growth and low inflation, we believe that the most adequate for the hedges are dollar and duration, which translates into US Treasury Bonds. However, one of the biggest risks in this phase of the cycle is inflation, and that is where gold plays an important role. Gold is an asset that, as a real asset, offers protection in inflationary environments. For the other hand, unlike stocks and bonds, Gold does not offer a yield. However, given the current rates environment where a large number of bond trade with negative yield, we believe that nothing is better than less than nothing.
