BNY Mellon's Hutchins on precious metals and other safe havens
After a stellar 2019, investors are expressing growing interest in hedges against geopolitical challenges, US rate changes, and trade wars. Suzanne Hutchins, co-lead manager of the BNY Mellon Global Real Return fund speaks to Ridhima Sharma
Do you see more demand for downside protection from customers?
Surveying the market, we see quite a rocky road ahead. Markets are currently facing the combined threats of trade wars, rising populism and disruptive advancements in technology, leaving no shortage of reasons for global investors to feel nervous. 2019 was a year of equity revaluation without the earnings growth. The focus for 2020 will be on the latter where there is a great deal of optimism priced into the market
In this disrupted world investors need to be very flexible and liquid and diversify their opportunity set to make it as broad as possible, while guarding against wider risk.
With developed market government bond yields at already very low levels, gold provides safe haven characteristics as an alternative. Indeed, with stabilization of recent global data points, the market may soon start to worry about inflation where gold would act as a hedge whereas government bond prices would decline.
Additionally, direct equity protection in the form of short futures and other option strategies provide an efficient alternative if managed actively.
Gold has been gaining in price, particularly more recently: do you expect this to continue, and if so, what are the implications for traditional asset classes such as equities and government/corporate bonds?
The uncertainty wrought by rising Chinese debt and wider market leverage, upcoming US elections and other factors such as Brexit could play well for ‘safe heaven' assets and gold in particular in 2020.
The current uncertain market - and the fast evolving backdrop with the potential threat of looming inflation - are encouraging investors to look more closely at multi-asset investing that are dynamic and unconstrained..
From a multi-asset perspective, gold does have some specific advantages. We strongly believe gold is a robust real asset / currency with the potential to do well in both inflationary and deflationary markets when real rates decline. Despite the risk of a return to higher inflation at some point, so-called safe haven assets like gold could benefit, unlike fixed income investments. Gold has the advantage of being an alternative currency to fiat money. You can't print it and it will tend to retain its value and do well in an inflationary environment.
Equities should also do well with rising inflationary conditions assuming it is not an environment of ‘stagflation' whereby costs go up but growth stalls. Fixed interest investments lose out in this environment unless there is an inflation-hedge built in such as Index-Linked securities.
Apart from gold, do you expect increased interest in asset classes that also historically act as hedges against downside risk?
In our economic outlook more broadly, we expect more volatility ahead and believe investors should keep their options open by employing a flexible approach that embraces a wide range of asset classes and geographic exposures.
Beyond gold, we believe pockets of value can be found in other areas. Cash of course, is always ‘king' when risk assets fall and provides opportunity to buy into cheap assets without becoming a forced seller if fully invested. Other asset classes, diversifying away from equities may well hold up better in falling markets (but likely to still lose value) which is why we have alternative exposure to infrastructure, renewables, risk premia systematic strategies, air craft leasing and patent related return streams.
Additionally, direct equity protection in the form of short futures and other option strategies provide an efficient alternative if managed actively.
How do investors access gold and other hedges on an ESG basis?
There are many ways that an investor could gain exposure to gold. Investors can still buy physical forms of gold but they can also access the commodity through the use of options, futures or gold exchange-traded funds (ETF). It is also possible to gain exposure to gold by investing in the mining process; however, from an ESG standpoint we believe that further gold mining is not a sustainable activity.
A more attractive investment opportunity for ESG investors is in the significant amounts of gold already above ground. Gold can offer a sustainable investment as it is always recycled and requires minimal energy for storage (compared with cryptocurrencies).
When investing in gold ETFs, as active managers we evaluate each investment opportunity on a case by case basis. Our robust ESG screening process has allowed us to identify those ETFs that own physical gold as opposed to holding gold investments based on financial instruments, meaning only small physical flows go into and out of the holding. Although gold-mining equities and bonds are currently unsuitable for sustainable strategies, we believe there are some gold ETFs that satisfy our inclusion criteria.
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