Steen Jakobsen, chief economist and chief investment officer at Saxo Bank, is even more bearish saying the latest data shows the US economy is shrinking dramatically, with the manufacturing purchasing managers’ index (PMI) tumbling to its lowest level for a decade. It slipped to 50.5 in May from 52.6 the month before. A figure below 50 means contraction and that is only a whisker away.
He expects the Fed to cut rates by 0.5 per cent in the next quarter but says this will be “too little, too late” as it needs to be far more aggressive to save a slowing economy. “Being bold, I would argue the Fed will have to cut by 100 basis points by the end of the year,” he adds.
Mr Jakobsen expects stock markets to become more volatile over the coming months and suggests investors take profits in US equities, which now look expensive and over-bought.
He recommends investing some of your portfolios in low-risk US government bonds, known as US Treasuries.
Bonds pay a fixed rate of interest and therefore look attractive when interest rate expectations are falling, as is the case now.
At the time of writing, 10-year Treasuries yield 2.05 per cent and Mr Jakobsen says: “We are overweight on fixed income generally, as we believe it should perform well as inflation falls, global growth goes negative and a recession becomes more likely.”
If you are worried about stock market volatility, this could give you a long-term hedge. Yields are low by historical standards, but your capital is protected.
Tip: Low-cost exchange-traded funds (ETFs) are a good way to buy government bonds and one option is the USD Treasury Bond UCITS ETF (VDTY), which invests 100 per cent in US Treasuries and currently yields 2.91 per cent with a year-to-date return of 5.21 per cent, according to Bloomberg. Or spread your risk across different developed countries with the iShares Global Govt Bond UCITS ETF (IGLO), up 4.72 per cent this year and yielding 1.19 per cent.
Hedge against volatility with gold
The gold price has jumped a hefty 10 per cent in the last month, according to Goldprice.org, as political worries spook investors.
Chris Beauchamp, the senior market analyst at online trading platform IG, says the spot price has hit a five-year high of $1,409 as traders rush into safe havens. “The prospect of a weaker dollar coupled with rising tensions in the Middle East could drive the gold price even higher, as investors look for a store of value amid current uncertainty.”
Most advisers recommend investors to have some exposure to gold, because it tends to rise when share prices crash and fall when they rise, offsetting volatility elsewhere in your portfolio.
Just remember the gold price can fall sharply and it doesn’t pay any income, unlike dividend-paying stocks, interest-bearing savings accounts or rental properties.
Fawad Razaqzada, the technical analyst at Forex.com, sees a strong bullish trend for the precious metal due to dovish central banks and growth concerns. “A positive resolution to the trade spat may not be such bad news for gold as it will boost demand from China, one of the top gold consumer nations.”However, that makes it popular in times of falling interest rates, when there is less competition from cash, Mr Beauchamp says.
Tip: Several ETFs track gold including ETFS Physical Gold (PHAU) and iShares Physical Gold (SGLN). You could buy individual gold mining stocks such as London-listed Centamin, up 36 per cent in the last month, but this is more risky. Investment trust BlackRock Gold and General invests in the shares of companies which derive a significant proportion of their income from gold
Take a return trip to Asia-Pacific
Don’t get swept away by the gloom because there is still a fair chance that stock markets could continue their strong start to the year. The doomsayers have been warning of a crash for the last decade but it still hasn’t come.
Mark Chahwan, co-founder and chief executive of Sarwa, the first robo-adviser regulated by the Dubai Financial Services Authority, says the key to successful investing is to stay the course, rather than selling up when markets get tough. “While it might seem counterintuitive to keep your money invested when there’s volatility in the markets, playing the long game will pay off.”
Instead of running for cover, brave investors should be looking to buy shares instead. “Falling markets are an opportunity to buy stocks at a lower price than they were a few months ago.”
Jahangir Aka, managing director for MEA at fund manager Neuberger Berman in Dubai, says avoid the US with shares at record highs. “US equities now appear to be fully valued after a strong rebound and investors are facing slower earnings.”
Instead, he suggests looking to the Asia-Pacific region, which may benefit from stimulus-led growth in neighbouring China, as it tries to offset the trade war slowdown. “Emerging market valuations are attractive and stocks are likely to be supported by China’s growth pick-up.”
Andrew Lister, joint manager of Aberdeen Emerging Markets Investment Company, says emerging market valuations are attractive yet global investors are significantly underexposed. “If a full-blown trade war ensues then these factors count for little but if that is not the outcome then the prospects of a rally resuming appear promising.”
Mike Kerley, portfolio manager of Henderson Far East Income, says Asia-Pacific is increasingly attractive to dividend investors, with dividends jumping 8.3 per cent in the year to April 2019 to a record £229.7 billion (Dh1.07 trillion). “Companies across Asia-Pacific are increasingly adopting a culture of dividend-paying as operations become strongly cash generative,” he adds.
Asia-Pacific could help to offset weakness in the developing world stocks in your portfolio.
Tip: The iShares MSCI EM Asia UCITS ETF (CEMA) has a large China exposure but also tracks equities in South Korea, Taiwan, India and Thailand. Vanguard FTSE Developed Asia Pacific ex-Japan UCITS ETF (VDPX) focuses on Australia, South Korea, Hong Kong, Singapore and New Zealand. SPDR S&P Pan Asia Dividend Aristocrats UCITS ETF (ZPRA) is one of the few Asia trackers to cover Japan as well.
Source: The National.