US economy, Equities, Markets Consider portfolio hedges amid macro uncertainty

The consecutive gains over the past three weeks have come amid solid first-quarter earnings and softer economic data, which reignited hopes that the Federal Reserve will eventually start easing monetary policy this year.

However, with markets seemingly priced for perfection, any disappointment in the US inflation print is likely to lead to pullbacks that may be disproportionate to what the overall macro environment suggests. While we expect disinflation to resume in the coming months based on recent economic indicators, we also think investors can take action to protect their portfolios amid macro uncertainty.

Gold typically acts as a haven asset, while oil can help insulate portfolios from certain risks. Gold may face some headwinds if markets further scale back Fed rate-cut expectations, but we retain our bullish price forecast of USD 2,500/oz by year-end 2024 on robust central bank and investor demand. In addition to providing a measure of diversification and reducing overall volatility within a portfolio context, gold’s utility as a geopolitical hedge has underpinned its price rise this year. Oil, in the meantime, should also serve as a portfolio hedge if attacks in the Middle East escalate further. We expect Brent crude to trade at USD 91/bbl over the coming months amid healthy demand and efforts by OPEC+ countries to keep the oil market in balance, and we advise investors with a high risk tolerance to sell the risk of Brent prices falling.

Hedge funds may help stabilize portfolio exposures and improve overall risk-adjusted performance for risk-tolerant investors. Hedge funds have historically exhibited an ability to capture tactical dislocations across sectors and asset classes to generate alpha, while still adhering Main contributors—Global economy, Equities, Markets—to strict risk limits. Indeed, certain hedge fund strategies have historically demonstrated their ability to benefit in periods of central bank monetary policy transitions. For investors willing and able to manage the risks associated with alternatives (e.g., illiquidity), we believe an allocation to hedge funds provides a source of uncorrelated returns that can help insulate portfolios from potential losses.

Structured investments can help investors gain exposure in a more defensive manner. The current environment of high interest rates and modest market-implied volatility presents an opportunity to use structured strategies to position for further equity upside while protecting against downside. For those looking to add more cautious exposure to markets, we also see opportunities in yield-generating and capital preservation strategies.

So, while we continue to see a supportive backdrop for risk assets, we think having portfolio hedges is important for investors amid elevated uncertainty.

Original report - Consider portfolio hedges amid macro uncertainty, 14 May 2024.