THE global economy is still embroiled in the US-led tariff stalemate, although market volatility has eased on hopes that US President Donald Trump will soften his stance and strike deals with trade partners.
This market lull, while temporary, could be useful.
Investors have an opportunity to use the relative calm to add portfolio bulwarks, including gold and developed-market, investment-grade government bonds, as well as to diversify currency exposure to mitigate the risk of a prolonged decline in the greenback.
Opportunity in bond volatility. Following Trump’s imposition of steep reciprocal tariffs on Apr 2, US equity market volatility, as measured by the VIX index, spiked to multi-year highs above 50.
The volatility in US government bonds, measured by the Move index, soared to a two-year high. The US 10-year government bond yield rose to nearly 4.6 per cent.
We believe short-term yield spikes above the 4 to 4.25 per cent range are opportunities to invest in US government bonds.
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Overweight on developed-market, investment-grade government bonds. The recent bond market volatility, compounded by the greenback’s weakness, led many to question the status of US government bonds as a safe-haven asset.
We have a near-term upside bias in US long-dated bond yields in light of persistent policy uncertainty. Still, US growth prospects are slowing. China is also unlikely to accelerate the sale of its Treasury bond holdings, in our view.
This suggests that upside to US bond yields is likely limited over a six to 12-month horizon. Therefore, current yield levels provide a good entry point for long-term investors to add to high-quality, investment-grade government bonds.
Overweight on gold. Gold has been the best-performing asset class this year, having surged more than 20 per cent year to date, due to the geopolitical uncertainty and weaker US dollar.
This has spurred significant flows into physically backed gold exchange-traded funds (ETFs) totalling US$21 billion in the first quarter of the year – the second-highest quarterly inflow on record, according to the World Gold Council.
Interestingly, Asia – likely affected the most by US tariffs – accounted for 16 per cent of the inflow. However, the region represented only 7 per cent of the total assets under management for gold ETFs. The two key market contributors in the region were China and Japan.
Tariff concerns and the greenback’s weakness were likely the primary reasons behind the strong demand for gold, with inflationary pressures an additional catalyst for Japanese buyers.
We expect gold prices to scale to a new high of US$3,500 an ounce in the coming 12 months, supported by continued strong central bank buying and prolonged policy uncertainty.
Don’t put all eggs in one currency basket. A major development this year is the US dollar index’s break below its three-year trading range of 100-110.
The 8 per cent plunge in the currency year to date is unwelcome news to many investors who have allocated a lion’s share of their portfolios into US dollar-denominated assets.
As the Trump administration seeks to reorganise the global trade order, it is time for investors to look for geographic and currency diversification.
We believe fiscal policy support in major economies, such as the European Union and China, would provide pockets of investment opportunities, while the US tackles mounting debt and the rising cost of living.
Therefore, balanced allocations into Asia and Europe will allow investors to not only participate in the regional growth initiatives, but also hedge against the risk of a prolonged US dollar decline.
Diversify into alternative investments. Our asset allocation model suggests allocation into alternative investments, including but not limited to hedge funds, private equity, private credit, infrastructure and sports investments.
We believe this strategy is particularly pivotal at a time when stocks and bonds could move in a similar direction under a persistently high inflation regime.
Alternative assets provide a source of returns historically proven to be uncorrelated to publicly traded assets, helping to moderate portfolio volatility and enhance overall investment returns.
The writer is chief investment officer (North Asia) at Standard Chartered Bank’s wealth solutions unit
