Investing in key assets that pass my diversifier test
One of the most crowded trades at the moment is the “Q4 crash” trade. Many investors are worried about galloping inflation — which in my view is probably not as bad as some think. Arguably, though, a larger group is fearful of the relentless optimism in US equity markets, which nothing as yet seems able to derail.
The Delta variant? No worries, just buy tech stocks. China-US relations sliding? Not a problem, just buy US growth stocks. Valuations using traditional methods going through the roof? Keep cool and think about the boom in US earnings. The optimists may turn out to be right but the probability of an upward bounce in market volatility is growing, made worse in my view by China’s crackdown on real estate developers and tech.
Sensible investors will look to diversify. But in a globalised market where everything seems correlated, including much of the bond market, that’s a tough nut to crack.
I’ve been pondering this and have come up with a shortlist of ideas that can be implemented using accessible funds and stocks. Crucially, most of the suggestions, many of which I hold, have provided the right kind of diversification in the past few years.
It’s easy for an investment to produce diversified and uncorrelated returns simply by dint of being a terrible investment. In other words, while everything else has been going up in value, these have been heading in the other direction. Hopefully most of these alternatives pass that test.
There are two “buckets” of ideas. The first are interesting options powered by forces not necessarily related to the ups and downs of the business cycle. One is the opportunity in the nuclear industry and its difficulties in accessing uranium supplies. Prices have shot up since I last wrote about this, but I think the opportunity is still huge — and almost entirely unrelated to the gyrations of the stock market. In my view, the easiest way into this is via Aim-listed physical uranium owner Yellow Cake.
Next we have the price of carbon emissions, via a new exchange traded fund (ETF) from Wisdom Tree. This tracks the price of carbon via the EU emissions trading scheme. This price will increasingly be influenced by policy decisions around emissions targets and growing financial interest in speculating on carbon prices. My target is a price of €100 per tonne within a few years.
Listed hedge fund BH Macro (now incorporating its old sister fund BH Global) invests in various diversified long, short and macro strategies, all run by Brevan Howard, an established player in this space. Its record in times of market volatility is excellent, but it has also managed to eke out positive returns even during more bullish markets.
If everything goes to hell in a handcart we can expect a wall of money to head towards the yen
On a side note, if you are looking for a simple way of making money during periods of heightened market volatility, why not invest in groups such as CMC Markets and Plus500, which make big profits from speculative day traders using spread betting platforms? They’re both very profitable even in normal times but when extreme volatility hits markets their profits shoot up.
The next three diversifiers are very traditional and almost need no explanation. Long-dated US government Treasury bonds seem a reasonable safe haven asset to me, yielding 1.32 per cent. Another classic diversifier is the yen, accessed through a Wisdom Tree fund — a currency tracker that is long the Japanese yen and short UK sterling.
Unlike nearly all the ideas in this table, it’s a classic “if all else goes wrong” safe haven asset that hasn’t actually made much of a profit in the past few years — but if everything goes to hell in a handcart we can expect a wall of money to head towards the yen.
My penultimate suggestion is the least surprising of all: physical gold. There are any number of options out there including ETCs, direct online holdings via outfits like BullionVault and a range of app-based products such as Glint and Tally. Given current geopolitical challenges, investing in Chinese local currency bonds is a very adventurous idea. But renminbi-denominated bonds are one of the few sovereigns to offer positive real returns from a currency that is slowly appreciating over time.
My second basket of ideas are more conventional but comprise those equities which might provide some diversification. Arguably the most speculative is Russian equities via the JPMorgan fund listed on the London market. The Russian economy is more isolated than it has ever been, with a strong fiscal position, oodles of central bank reserves, and a reputation for maverick thinking.
In equities there’s nothing more defensive than tobacco stocks, represented here by British American Tobacco (BAT). All of the mega tobacco companies are now government-regulated money making machines and are shunned by many investors, especially those with ESG leanings. Yet in terms of classic fundamentals, there’s still nothing that quite beats them, except for some big pharma stocks.
Healthcare can be easily accessed via a Polar Capital listed fund — its Healthcare and Income trust, which has a cautious mandate to invest in solid, income-producing large caps. I think this healthcare fund is likely to be a bit more volatile than the tobacco stock, but the long-term drivers of demand aren’t likely to be derailed by a sudden stock market panic.
There is also one hugely speculative idea in that first bucket of alternatives: Aquis-listed KR1. I’ve studiously avoided mentioning anything bitcoin or crypto related. I’m not convinced that these digital currencies will prosper at a time of intense market turbulence. To me, they have become an alternative to owning meme stocks or tech growth stocks.
If I’m wrong, crypto will boom in a crash. But that boom would also benefit the early stage world of decentralised finance. This is the focus of KR1, a listed crypto venture capitalist, which is in essence a leveraged play on crypto becoming even more mainstream in a market crash. It’s absolutely not recommended for defensive investors. But as an “out there” alternative diversifier it is worth looking at — for the truly adventurous.
David Stevenson is an active private investor. Among the securities mentioned, he has interests in Yellow Cake, ETFS Carbon, BH Macro and KR1 and owns physical gold.Email: [email protected]. Twitter: @advinvestor