• 13 hours The Surprising Businesses Deemed “Essential” During The Coronavirus Lockdown
  • 17 hours Priceless Van Gogh "Spring Garden" Painting Stolen
  • 19 hours Oil Falls To $20 For First Time In Nearly Two Decades
  • 21 hours COVID-19 Could Be The End Of U.S. Coal
  • 2 days How Much Does Your Social Security Number Cost? $4 On The Dark Web
  • 3 days Silver Stocks Have Been Decimated In The Coronavirus Sell-Off
  • 4 days How Blockchain Tech Could Make Mergers And Acquisitions More Efficient
  • 4 days America’s Shortage Of This Metal Keeps Trump Up At Night
  • 5 days Bidet Bonanza: Defying The Toilet Paper Shortage
  • 5 days U.S. Auto Sales Fall By 75%
  • 6 days Violating Quarantine? Big Brother Is Watching
  • 6 days Does Gold Still Have Some Room To Run?
  • 6 days Major Acquisition Gives The World’s First Green Ride-Share Another Edge
  • 7 days U.S. Pushes For Digital Currency For Immediate Stimulus
  • 7 days The Impossible Challenges Created By Growing Population
  • 7 days Gold Skyrockets After Fed Pledges "Unlimited" Cash To Boost Economy
  • 8 days World’s Richest Lose $1 Trillion In Stock Market Rout
  • 8 days Gas Stations Shut Down In Venezuela As Coronavirus Crisis Intensifies
  • 8 days The Best And Worse Case Scenario For The U.S. Stock Market
  • 9 days 3 Industries Soaring During The Coronavirus Crisis
Airbnb IPO Under Threat As China's Economy Drags

Airbnb IPO Under Threat As China's Economy Drags

The coronavirus outbreak in China could derail…

U.S. Regulators Take Aim At Foreign Investments

U.S. Regulators Take Aim At Foreign Investments

The Trump administration and US…

  1. Home
  2. Investing
  3. Other

Trade War Pushes Ultra-Rich Back Into Cash

Cash

President Donald Trump insists China’s eager for a trade deal, but Wall Street is hardly convinced, and neither are wealthy individuals. At least that’s what the latest data seems to suggest. According to a survey by the world’s largest wealth manager, UBS AG, high-net-worth portfolios are, in aggregate, 32 percent in cash. Asia’s and Latin America’s wealthy are the most guilty of hoarding cash, with 36 percent of their portfolios liquid, with majority of Asian investors fearing a trade war fallout while Latin Americans are more concerned with high levels of inflation (never mind that cash is a poor inflation hedge).

Europe is not much better off, with 35 percent assets allocated to cash.

The U.S. is the only outlier, with only 23 percent of high-net-worth portfolios in cash.

The ‘Investor Sentiment’ survey polled 3,600 high-net-worth individuals with at least $1 million in investable assets or business owners with at least $250,000 in annual revenue and at least one employee between March 10-28 across 17 countries.

Yet, these investors could be doing themselves a disservice...

Missing out on the good times

Cash is considered a safe asset for a liquidity strategy especially during times of economic uncertainties or high volatility. Experts have repeatedly warned that a full-blown trade war between the U.S. and China could result in a significant slowdown for a global economy that’s already on the skids.

That said, these risk-averse high-net-worth individuals could be missing out on an opportunity to enjoy even better returns on their portfolios.

There are no hard and fast rules regarding the cash threshold for an average portfolio. Academic evidence, however, suggests that the maximum risk/return trade-off occurs when cash constitutes somewhere between 10-20 percent of a portfolio. Indeed, for long-term investors with a horizon exceeding 10 years, cash levels in excess of five percent can produce a notable performance drag.

This applies across all portfolios sizes not just large ones.

Consider that global equity markets have been defying all the talk about trade wars and a slowing economy and have managed to put up double-digit gains during the first third of the year alone.

(Click to enlarge)

Asian mutual funds have been underperforming the region’s equity markets due to overly conservative positioning, including defensive positioning in underperforming South Asian markets as well as consumer sectors.

(Click to enlarge)

Source: Bloomberg

Trade Wars: Strategies to Protect your Portfolio

Trade tensions have been escalating with each White House statement or tweet by President Trump. With the latest attack by the president claiming that China broke the trade deal and must therefore pay, it might almost take a miracle for Washington not to go ahead with its threat to hike tariffs on $200 billion worth of China exports to the U.S. from 10-25 percent effective midnight Friday.

Related: Banks Are Doubling Down On Risky Credit Card Debt

The markets are clearly spooked, with the Dow Jones down nearly 400 points at 10.30am ET Thursday while the S&P 500 has dropped 1.35 percent.

(Click to enlarge)

Source: CNN Money

There are a couple of strategies that investors can employ to protect their portfolios and preserve capital.

Commodities like gold and oil can be a useful hedge against higher prices and a weaker dollar, two of the most likely outcomes from a trade war. As at the time of going to press, spot gold is up $7.00 (0.55 percent) to trade at $1288.40 per ounce thanks to the Dollar Index dropping 0.3 percent.

Oil, however, is yet to respond to the correction with WTI crude down 1.6 percent to $61.14 per barrel.

Including TIPS (Treasury Inflation-Protected Securities) in your portfolio can also serve as an effective inflation hedge. TIPS also perform well during times of falling interest rates, which seems the likely course of action by the Fed if trade wars escalate. The long-duration iShares TIPS Bond ETF (TIP) is up 0.2 percent on the day.

(Click to enlarge)

Source: Seeking Alpha

Finally, increasing your allocation to foreign bonds can help your portfolio during turbulent times. Asset managers such as PIMCO and Eaton Vance tend to have a better understanding of foreign markets than the average investor.

By Alex Kimani for SafeHaven.com

More Top Reads From Safehaven.com:

Back to homepage

Leave a comment

Leave a comment