Time to add portfolio bulwarks

The global economy is still embroiled in the US-led tariff stalemate, although market volatility has eased on hopes that President Trump would soften his stance and strike deals with trade partners. This market relief, while temporary, could be useful – investors have an opportunity to use the relative calm to add portfolio bulwarks, including gold and developed market investment grade government bonds, as well as to diversify currency exposure to mitigate the risk of a prolonged decline in the US dollar.

Bond volatility presents an opportunity

Following Trump’s imposition of steep reciprocal tariffs on ‘Liberation Day’ (2 April), US equity market volatility (measured by the VIX index) spiked to multi-year highs above 50, while volatility in US government bonds (measured by the MOVE index) soared to a two-year high and the US 10-year government bond yield shot up to nearly 4.6%. We believe short-term yield spikes above the 4.0-4.25% range are opportunities to tranche into US government bonds.

Overweight on Developed Market Investment Grade Government Bonds

Recent bond market volatility, compounded by the dollar’s weakness, has led many to question the status of US government bonds as a safe haven asset. We have a near-term upside bias in US long-dated bond yields in light of persistent policy uncertainty. Notwithstanding this, US growth prospects are slowing. China is also unlikely to accelerate sale of its treasury bond holdings, in our view. This suggests that upside to US bond yields is likely limited over a 6-12 month horizon. Therefore, current yield levels provide a good entry point for long-term investors to add to high quality investment grade government bonds.

Overweight on Gold

Gold has been the best performing asset class this year, having surged over 20% year to date, given the geopolitical uncertainty and the weaker dollar. This has spurred significant flows into physically backed gold ETFs totalling USD 21bn in Q1 this year, the second highest quarterly inflow on record, according to the World Gold Council.

Interestingly, Asia, likely impacted the most by US tariffs, contributed 16% of the inflow, though it represented only 7% of the total assets under management for gold ETFs. The two key market contributors in the region were China and Japan. Tariff concerns and the dollar’s weakness were likely primary reasons behind the strong demand for gold, with inflationary pressures serving as an additional catalyst for Japanese buyers. We expect gold prices to scale to new highs of USD 3,500 per ounce in the coming 12 months, supported by continued strong central bank buying and prolonged policy uncertainty.

Don’t put all eggs in one currency basket

One major development this year is the US dollar index’s break below its three-year trading range of 100-110. The 8% plunge in the currency year to date is unwelcome news to many investors who have allocated a lion’s share of their portfolios into US dollar-denominated assets. As the Trump administration seeks to reorganise the global trade order, it is time for investors to look for geographic and currency diversification.

We believe fiscal policy support in major economies, such as the European Union and China, would provide pockets of investment opportunities, while the US tackles mounting debt and rising costs of living. Therefore, balanced allocations into Asia and Europe will allow investors to not only participate in the regional growth initiatives, but also hedge against risks of any prolonged US dollar decline.

Diversifying into alternative investments

Our asset allocation model suggests allocation into alternative investments, including but not limited to hedge funds, private equity, private credit, infrastructure, and sports investments. We believe this strategy is particularly pivotal at a time when stocks and bonds could move in a similar direction under a persistently high inflation regime. Alternative assets provide a source of returns historically proven to be uncorrelated to publicly traded assets, helping to moderate portfolio volatility and enhance overall investment returns.

Disclaimer

This article is for general information only and it does not constitute an offer, recommendation or solicitation of an offer to enter into any transaction or adopt any hedging, trading or investment strategy, in relation to any securities or other financial instruments. This article has not been prepared for any particular person or class of persons and does not constitute and should not be construed as investment advice or an investment recommendation. It has been prepared without regard to the specific investment objectives, financial situation or particular needs of any person or class of persons. You should seek advice from a licensed or an exempt financial adviser on the suitability of a product for you, taking into account these factors before making a commitment to purchase any product or invest in an investment. In the event that you choose not to seek advice from a licensed or an exempt financial adviser, you should carefully consider whether the product or service described herein is suitable for you.

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Singapore dollar deposits of non-bank depositors are insured by the Singapore Deposit Insurance Corporation, for up to S$100,000 in aggregate per depositor per Scheme member by law. For clarity, these investment products are not deposits and do not qualify as an insured deposit under the Singapore Deposit Insurance and Policy Owners’ Protection Schemes Act 2011. Foreign currency deposits, dual currency investments, structured deposits and other investment products are not insured.

The information stated in this article is accurate as at the date of publication.