Of Fed rates, cash and gold

CFA Society panellists (from top) Phoon Chiong Tuck, Jack Wang, Praveen Jagwani and Simon Ng favour gold as a hedge against an uncertain market and to help diversify the risks of the portfolios.
CFA Society panellists (from left) Phoon Chiong Tuck, Jack Wang, Praveen Jagwani and Simon Ng favour gold as a hedge against an uncertain market and to help diversify the risks of the portfolios.

The Sunday Times poses three questions to the CFA Society panellists.

Q Do you think the United States Federal Reserve will hike rates this year? What would be the implications on the portfolios?

MR PHOON The Fed is poised to raise the rate, given that US economic conditions have reached full employment. However, given the sluggish pace of growth, the pace of hikes is likely to be gradual.

Thus, while there is likely to be a hike this year, it is uncertain if the US dollar will strengthen. I think we can expect further volatility in the US dollar/Singdollar in the months ahead. Also, as credit spreads have tightened over the past few months, I suggest reducing the exposure in the iShares JPM Asia Bond ETF and switching to the ABF Singapore Bond ETF. This adjustment would reduce the portfolio exposure to both credit and US dollar/Singdollar volatility.

Q The three portfolios have delivered decent returns so far this year. With valuations in many equity markets appearing stretched now, should the panel take profit and hold cash? Or should cash holdings be deployed?

MR JAGWANI I would prefer to remain fully invested since market timing in the long run is not a meaningful determinant of returns. It is really difficult to consistently time the market accurately, as even professionals struggle to get this aspect correct.

MR WANG In my view, markets are looking a bit toppish, so I would prefer to maintain a healthy cash balance so that we can take advantage of opportunities down the road if markets correct.

MR PHOON Cash is generally a poor asset to hold, as holding cash will be a drag on performance if markets move higher. I would rather park the cash in instruments that provide some form of yield. Singapore Savings Bonds could be suitable if the time horizon is longer.

MR NG If the panellists have a view that we should go into risk-off mode, we should make a deliberate effort to bring cash up to a level of, say, 20 per cent, to demonstrate our conviction. So my thoughts are either we get the remaining cash fully invested, or unwind to a cash level of 20 per cent or more.

Q What assets are the panel comfortable buying now?

MR JAGWANI I think the US economy is looking reasonably resilient and global investors seem to have run out of options for deployment. Thus, I think money will continue to flow into the US equity market and I would add to the US equity exposure. As a hedge, I would increase the gold exposure in the portfolios to the extent possible.

MR NG I would be comfortable buying gold. The era of modern-day monetary omniscience is coming to an end. Look no further than the near 30 per cent year-to-date rally in gold that has it sitting at 28-month highs and the almost 50 per cent rise in silver this year to near two-year highs.

While yielding nothing and providing no cash flow, gold and silver are positive yielding assets in the current negative interest rate environment where trillions of dollars of bonds are giving negative yields. We are truly living in a world of monetary mayhem... Some are confident that gold and silver will be the last currencies standing.

MR PHOON In this uncertain world, I think it is good to have a portion in gold as a hedge.

MR WANG I am not comfortable buying US equities at current valuations but concur with the views on gold and believe that gold's negative correlation with traditional asset classes will help diversify the risk of the portfolios.

Lorna Tan

A version of this article appeared in the print edition of The Sunday Times on September 11, 2016, with the headline 'Of Fed rates, cash and gold'. Print Edition | Subscribe