The million dollar question for investors trying to navigate the trade waters is where to place their cash to safely sail through this storm. Wall Street has been sifting through the typical safe havens, as spat after spat of trade wars began this spring. We first have to examine the current economic climate to see what makes sense. It happens to be about monetary policy and the dollar, which has been propelled by expectations for stepped-up Federal Reserve tightening, and has hammered a wealth of markets since April, when benchmark 10-year Treasury yields first peaked through 3 percent. Let’s take a look at the usual suspects, and see how they are faring in this volatility.
Gold, which has been a haven for millennia in times of turmoil, hasn’t been so hot the past three months, falling more than 5 percent.
Japan’s yen, often a safe harbor primarily due to the country’s status as the world’s biggest net creditor, has dropped almost 3 percent in that period.
Switzerland’s franc, another favorite for the cautious, is also down 3 percent.
Behind the declines of all three has been the appreciation of the dollar, up more than 4 percent as measured by the Bloomberg Dollar Spot index. Those that think of Bitcoin as a non-correlated asset class are not being supported by the markets. Nobody really cares about Bitcoin for now. All roads eventually lead back to the greenback. And why shouldn’t they? Again the not so subliminal message is that despite the constant anti-Trump rhetoric, the U.S. is still the best thing in the world for a risk-free return. Patrick Artus, chief economist at Natixis Securities, wrote of U.S. government securities in a note this week that, “They are a safe haven even when shocks come from the United States.”
Risk management is always key, and especially in volatile markets. Let Modern Portfolio Theory remind you that it is not which equities or individual securities you are in, it is the portfolio as a whole, and the gestalt principles of asset class allocation are the only thing that matters. Volatility suggests a greater weight toward cash and bonds, where investors appear to be heading now. “Liquidity management instruments such as money market funds are good for investors to park cash in dollars,” said Fan at HSBC. “When more attractive levels emerge, they can put cash back to work,” she said.
With that said, the longer-term time horizon will allow you to think of including different asset classes in your portfolio. Australian equities have proven that a strong Australian dollar is currently working well for Australian companies. India is also on analyst’s radar, where the S&P BSE Sensex Index is up about 2 percent since the end of the first quarter in dollar terms, compared with a 9 percent tumble for the MSCI Emerging Markets Index.
With what appears to be the same story, just a different season, the U.S. dollar and its dollar-denominated instruments still control the world of so-called risk-free investments. I do not envy those who have to guide money through these markets for a living. While there has always been stress, it is now ratcheted up to a new level.