Which Assets Can Shield Your Portfolio as Geopolitical Tensions Escalate?

  • Market Overview

A few hours back, Russia’s president Vladamir Putin and his Defence Minister Sergei Shoigu appeared on Russian TV  and ordered a partial mobilization of troops which could be a significant move in the ongoing war as Russia keeps on losing its ground for the last couple of weeks. Not just that, Putin also stressed upon using ‘all means’ to protect the integrity of its land and cleared the air of Russia running out of weapons, stating it has a “lot of weapons to reply”.

The US and European leaders are taking it as a warning of a possibility of a nuclear war which has escalated tensions in the global markets. How can you protect your portfolio amid this continued volatility? Definitely, an equity market is generally the first market for liquidation during these tough times as investors want to flee to safety. There are a few assets that are considered to be safe havens when the world goes through major turmoils. Some of them are listed below:

Gold

Without a doubt, gold is one of the best assets when it comes to pure safety. Although, gold might not give you a return that equities can give but it can surely minimize portfolio drawdowns with its ability to remain stable or even appreciate when uncertainty hits the world.

Gold has not performed well this year. Although it spiked soon after the Ukraine-Russia war, the rally fizzled out in a jiffy. One of the biggest reasons for this is the rapidly increasing interest rates across the world. As interest rates go up, investing in gold becomes less lucrative against the rising bond yield. However, currently, gold in the international markets is trading near a 2-year low which could give conservative investors an ideal dip to capitalize.

Bonds

Investing in debt during uncertain times and inflationary periods is a no-brainer. As the Ukraine-Russia war continues for around 7 months, inflationary pressure is piling up due to supply chain disruptions. The European economy is especially at a higher risk due to rising energy prices which are expected to soar even higher in winters.

The Indian market, having been decoupled from the US markets is somewhat trading at higher valuations which again increases a downside risk. To flee to safety, and take advantage of rising interest rates, bonds are a good option for investors. In fact, GOI-backed securities are offering very lucrative returns in today’s scenario, with yields of over 7% in 10-year bonds .

Currencies

There are a few currencies that are also investors’ favorite to park their money. One of the most popular is - the US Dollar . However, there is no ETF to buy dollars in India, therefore at the closest, investors have to rely on the USD/INR pair in the futures market. In fact, today the USD/INR September 2022 contract rose 0.29% to close at 80, amid Putin’s statement and ahead of the US Fed’s rate hike as investors were looking to switch to the dollar against the rupee. 

Another currency is the Japanese yen, which also attracts investors to safeguard their money, as Japan is considered to be one of the most stable economies in the world. Again, as there is no ETF to buy the yen, investors have to rely on the JPY/INR pair in the futures market. The problem with the futures market is investors have to keep rolling their contract to the next expiry to hold them for the long term which increases the cost of holding on account of the premium on the next contract and transaction changes. The yen hasn’t performed well in recent times as Japan is an outlier that is refusing to increase interest rates. But that also makes it available at attractive levels of more than 7.5-year low. As soon as the Bank of Japan starts to increase interest rates (if it decides to), we could see a sharp rebound in the JPY/INR pair.



Disclaimer: The above-mentioned article is not a recommendation to buy/sell/hold any security. I have gold and the yen in my portfolio. 

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  • Girish Kandhari @Girish Kandhari
    No comments
    Like 0
  • Imran Ali @Imran Ali
    Indian retail investors will not diversify like this rather they will prefer sectoral diversification
    Like 1
  • Imran Ali @Imran Ali
    Indian retail investors will not diversify like this rather they will prefer sectoral diversification.
    Like 0
  • Imran Ali @Imran Ali
    Indian retail investors will not diversify like this rather they will prefer sectoral diversification.
    Like 0
  • CA Surendra @CA Surendra
    informative but not relevant at all sir
    Like 2
  • CA Surendra @CA Surendra
    informative but not relevant at all
    Like 0
  • CA Surendra @CA Surendra
    informative but not relevant at all
    Like 0
  • Ria Singh @Ria Singh
    very informative thanks
    Like 2
    • Aayush Khanna/Investing.com @Aayush Khanna/Investing.com
      I am glad you liked it Ria.
      Like 0
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