UK government bonds, some commodities and property funds are among the handful of assets that have tended to rise when global equities are falling, research by Trustnet suggests.
Last week’s sell-off has reminded investors of how quickly sentiment can turn and market commentators warn that the unpredictable nature of the ongoing coronavirus outbreak means further volatility could be ahead.
With this in mind, Trustnet has reviewed every negative week that the global equities (represented by the MSCI AC World index) have suffered over the past 20 years to gauge which assets have tended to hold up best.
Since the start of 2000, there have been 474 weeks when the MSCI AC World has posted a negative price return, with the smallest loss being just 0.003 per cent and the biggest 13.23 per cent (taking place in October 2008).
In the sell-off last week, the index was down 6.64 per cent, which was its worst showing since the global financial crisis.
When the price performance of equity and bond indices, commodities, open-ended fund sector and investment trust peer groups during these 474 weeks is examined, cash – specifically through short-term funds – cements it position as king.
The IA Short Term Money Market sector has made a positive return in 87.6 per cent of the weeks when global equities were down, with the average return across these 474 standing at 0.02 per cent.
Of course, this is nothing too surprising – the ability of cash to hold its value in times of stock market turbulence is well known. However, the fact that it won’t grow and will lose value over time is the very reason why investments in other assets are made.
Source: FinXL
The above table shows the investments that have made positive returns in the most negative weeks for global equities, along with their average return in these periods, their largest gains, biggest losses and their performance in last week’s sell-off.
However, it must be kept in mind that past performance is no guide to future returns. As the table above shows, some assets that have historically held up in sell-offs did suffer losses last week.
These numbers confirm that gilts – a classic safe haven – have been a good place for UK investors in down markets. The Bloomberg Barclays Sterling Gilts index was in positive territory 65.6 per cent of the time global equities were down and averaged a return of 0.25 per cent; its result last week was significantly better than this.
Gilt funds fared slightly worse, gaining in 61.2 per cent of the weeks with an average rise of 0.17 per cent. Vanguard UK Government Bond Index, Vanguard UK Long Duration Gilt Index, Threadneedle UK Fixed Interest, BNY Mellon Long Gilt and Allianz Gilt Yield are the individual funds have outperformed in the most down weeks.
Global government bonds have worked out less well for UK investors, although this is down to currency movements.
Kenneth Ward, a fixed income investment manager at Kames Capital, said: “To be clear, there are no winners if coronavirus continues to spread. However, as bond investors it behoves us to make a realistic assessment of how assets will perform under a pandemic scenario. This then allows us to take prudent steps to immunise portfolios as far as possible.
“Stating the obvious to an extent, government bonds will continue to perform well – or very well – under such a scenario. The US 10-year yield is pushing towards record low levels, despite the prevailing economic data coming out of the US continuing to be reasonably firm. However, while current levels are not underpinned (thus far) by observed economic data, we should expect these bonds to continue to outperform in a pandemic scenario.”
Funds in the IA UK Direct Property sector have also held up well historically, rising in 59.3 per cent of the weeks under consideration. That said, they made a loss in last week’s sell-off and many investors are nervous about open-ended property funds at the moment because of outflows and liquidity concerns.
Commodities such as silver, natural gas and wheat have made positive returns in a decent number of the MSCI AC World’s down weeks. However, many have posted an average loss across these periods as their losses in the weeks they underperformed were higher than their gains when they outperformed (although wheat seems to be an exception).
In addition, the heavy maximum losses seen by some commodities should make investors reluctant to use them as their only method of portfolio protection.
One commodity does have a strong reputation as a haven in difficult markets: gold. But investors warn that it’s far from a failsafe portfolio defender.
The S&P GSCI Gold Spot has risen in 51.3 per cent of the market’s negative weeks. However, it’s worth noting that this wasn’t the case recently as the yellow metal lost value in the coronavirus sell-off.
Matthew Yeates, senior investment manager at 7IM, said: “Gold has become one of the few safe haven assets investors are happy to back amid the huge swings being seen in equity markets in the last few weeks.
“However, holding gold in a meaningful way within portfolios can be a costly exercise over the long term. With no yield available, even with rates from traditional government bonds being very low by historical standards, it is still greater than the 0 per cent offered by gold.
“Even in the rush for safe havens last week gold fell when the threat of a coronavirus really peaked. There’s little credible explanation but it is worth remembering gold is not a fail-safe asset when equities fall, as is often believed. From March to November in 2008 the price of gold actually fell by over 30 per cent, despite the same period representing the peak of the financial crisis.”
Source: FinXL
When it comes to the sub-sectors of global equities, there are few clear places to hide in sell-offs and, as the table above shows, all were hit hard last week.
As can be seen, global utilities have made money in the most weeks that the MSCI AC World was down. But its 7.58 per cent fall last week was worse than the 6.64 per cent drop in the wider index.
The widespread losses that were seen across most assets during last week’s coronavirus sell-off makes for a confusing picture on where is best to seek protection in these particular circumstances, however.
Unigestion’s Olivier Marciot said: “[Coronavirus] has affected most market segments, making diversification ineffective and correlations convergent at the worst of times.
“The real impact of the outbreak on the economy has yet to be assessed, and it remains unclear whether the current drawdown is the beginning of a more protracted bear market or represents a new set of opportunities arising from excesses and dislocations.”