Havens Just Aren't Safe Anymore, Goldman Says
HSBC's David Bloom Says There Is No Inflation
Traditional safe havens haven’t been working out for investors in the latest ructions in financial markets, strategists at Goldman Sachs Inc. warned.
With the rise of inflation and interest rates, and the end of an era of low volatility, investors looking for effective hedges have to look beyond traditional havens such as bonds, the yen and gold, the Goldman analysis indicates. The problem is a lack of assets with "positive beta" to the VIX index of stock volatility -- in other words, assets that rise in value along with an increase in swings, such as when the S&P 500 Index tumbles.
“No safe havens -- and no assets or equity sectors -- have had a positive beta to the VIX recently, and few have had a positive beta to 10-year yields, leading to diversification desperation,” Goldman strategists including Ian Wright wrote in a March 12 note.
While bonds have typically offered a cushion for stock investors in time, the strategy may not work well as central banks roll back quantitative easing and raise rates -- especially when the U.S. government is going on a borrowing spree. One potential hedge for higher yields could be cyclical stocks, though -- Goldman found that consumer discretionary companies, for example, had a positive beta to 10-year Treasury yields.
The yen, a reliable refuge in times of turmoil thanks to Japan’s massive net-creditor position, could be less dependable thanks to the Bank of Japan’s determination to keep going with monetary stimulus.
And gold proved a loser during the late-January to early-February sell-off in U.S. stocks that spread round the world.
"Finding effective hedges in the cash space will continue to be difficult going forward as rates rise" and the Goldilocks scenario of non-inflationary growth fades, the Goldman strategists wrote. "Active risk management via derivative overlay trades will become more important for portfolios."
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