Wong says bonds offer relatively better advantages in the shorter run as an investment asset class over equities in times of uncertainty, declining interest rates and recessionary period or slowing growth.
PETALING JAYA: While the local equity market is looking for catalysts, the uncertainty and volatility in markets has attracted funds into bonds, precious metals and cryptocurrencies.
The banking failures in the United States have left global investors with a strong consensus that the path of least resistance for US front-end rates is lower with the Federal Reserve (Fed) cutting rates priced-in.
The fear of other banks under stress and peaking in the interest rate cycle has hit the US dollar and made precious metals, especially gold, the go-to crisis hedge for investors.
Gold had risen to Ukraine-Russia war period one-year highs of US$2,000 (RM8,812) per ounce from US$1,813 (RM7,988) on March 9, just when Silicon Valley Bank’s troubles started to hit the headlines.
The jump in bullion has seen the Philadelphia Gold and Silver Index, Dow Jones Precious Metals Index and the NYSE Arca Gold BUGS Index become the best-performing indices in the world in the past 30 days with gains of 23%, 24% and 25.56%, respectively.
Analysts think gold can hold on to the gains and even edge higher.
“Since the expectation on the Fed pivoting is higher, the precious metal prices are likely to stay elevated in the second quarter. Precious metals are generally used as a hedging tool, based on the fact that gold is priced in US dollars, and as the value of the dollar increases, it takes fewer dollars to buy the same amount of gold.
“Conversely, as the value of the dollar decreases, it takes more dollars to buy the same amount of gold, causing the price of gold to rise,” said Tradeview Capital chief investment officer Nixon Wong.
He added the relationship between gold (other metals) and the US dollar is not always perfectly linear and factors such as interest rates, inflation data, geopolitical events and market sentiment can also influence the price of gold.
Predicting the winner from the battle between the two safe havens – the US dollar and gold – is hard to do. There are still two schools of thought about the pivot and what it could mean for the asset classes and risk, said Stephen Innes, managing partner at SPI Asset Management.
“The bullish school emphasises the possibility of a soft landing in the US labour market, with vacancies falling and participation rising.
“The bearish school emphasises the risk of a hard landing from lingering stress in the banking system just when lagged effects of the Fed rate hikes hit the broader economy.
“If there is a US recession, as in a hard-landing scenario triggering global risk-off, the US dollar could gain strength on safe-haven demand and flows into US bonds,” he told StarBiz.
Wong added bonds offered relatively better advantages in the shorter run as an investment asset class over equities in times of uncertainty, declining interest rates and recessionary period or slowing growth.
“I do agree corporate earnings could face headwinds amid the slowing down global economy, but if the same scenario of a falling interest rate occurs, this could provide some upside support on stock valuations as well, especially on growth stocks as the cost of capital should reduce in tandem, positive to companies with higher focus on capital expenditures driving future business growth,” he said.
In addition, lower interest rates are positive on high dividend-yield stocks, given the potential yield gap compression arises from the lower long-term bond yields. The benchmark FBM KLCI closed 7.7 points higher at 1,435 yesterday.
The bank crisis in the United States has also attracted flows into cryptocurrency with bitcoin rallying some 39.7% in the past month to RM133,021 yesterday. After overcoming major issues in 2022, cryptocurrency looks to build on the gains with more oversight from regulators.
“I think better regulation, and after surviving some massive meltdowns like FTX and Three Arrows, which seemed to start the broader hypothecation daisy chain, many crypto curious have turned crypto buyers spurred on by the banking crisis in the United States,” said Innes.
