Investors move into defensive assets amid global economic worries

Added 27th June 2016

Rattled by a growing list of worries that could threaten the fragile global economy, including the UK's shock Brexit vote, investors around the world are amassing cash, favouring bonds over equities and increasing their holdings of gold.

Investors move into defensive assets amid global economic worries

The trend accentuated on Monday as last week’s vote by the UK to leave the European Union sent new shocks through financial markets causing the pound to slump to its lowest level since 1985 and sending stocks in the UK and Eurpe sharply lower, with banks and life companies particularly hard hit.

At the same time demand for safe-haven bonds has pushed yields down to their lowest levels on record.  On Monday the yield on British government 10-year bonds fell below 1% for the first time ever in line with a similar move by Germany’s benchmark 10-year bond yield earlier this month, which saw yields hit negative territory.

Meanwhile the price of gold rallied by 8% on Monday to be close to its highest level since 2009 at $1,335.30 an ounce.

Gold Rush

BullionVault, the world’s largest physical gold and silver online market, said users have added well over three-quarters of a tonne (834kg) to their gold holdings so far in 2016, and stored it in places like London, New York, Singapore, Toronto and Zurich.

Gold holding by BullionVault’s clients now stand at more than most of the world’s central banks keep in their reserves, it said.

“There is quite a lot out there to be concerned about and it is not going to go away in a hurry.”

This type of asset allocation by wealthy investors and institutions has been building over the past three months, and is generally associated with fears of an economic crisis.

Cash is king

A survey of asset managers by Bank of America Merrill Lynch earlier this month found investors were sitting on their largest stockpiles of cash since 2001 and had cut equity holdings to a four-year low.

Risk appetite, as shown in the Bank of America Merrill Lynch survey, has reached its lowest level in four years, which is usually consistent with a recession. But the same survey showed growth and profit expectations at a six-month high, with inflation expectations at a one-year high.

Rather than a single big event making investors worried, it seems a long list of potential problems, including the impact of the Brexit referendum is behind the current risk-off move.

Concerns grow

These concerns range from the impact of higher interest rates in the US, to the health of the European banking system, the debt problems in China, the effect of ongoing loose monetary policy by many of the world’s major central banks.

In addition, investors have expressed ongoing concerns about the outlook for Japan, while softer commodity prices due to a slowdown in China have hurt the prospects for developing nations like Brazil, Russia and some African economies.

“There is quite a lot out there to be concerned about and it is not going to go away in a hurry,” said Julian Chillingworth, chief investment officer for Rathbones.

“There is a lot at play here, meaning growth around the developed world probably is not going to be that dramatic over the next few years.”

Caution rules

Chillingworth said the backdrop to these concerns can be traced back to the financial crisis of 2007-09, which was managed by a combination of government spending and central bank support.

“That meant we avoided a deep recession as occurred in the 1930s, but the recovery is prolonged and lacklustre.” Not surprisingly, Chillingworth said this has made investors very cautious.

But there may be another factor at work, at least behind the stockpiling of cash, which is that once some of these concerns have passed, new opportunities are around the corner.

Frédéric Lamotte, global head of market and investment solutions at Indosuez Wealth Management, said holding liquid assets is a key issue for what might happen in the coming months.

“We are prepared for what could happen in the summer. We have to be able to grasp these opportunities, and for that you have to keep the powder dry.” 

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Richard Hubbard

Group Editor

Richard Hubbard is the group editor at Last Word. He is responsible for the editorial content of International Adviser, Portfolio Adviser, Expert Investor and Fund Selector Asia. Richard previously worked for Thomson Reuters and has covered the financial services industry and investment themes from its offices in London, Singapore, Hong Kong and New York. Richard started his career at the Australian Financial Review in Sydney.

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