Traditional defensive assets fell short of investors ’expectations during recent turmoil in financial markets, Bloomberg writes with reference to Goldman Sachs Inc. strategists
With rising inflation and interest rates and the end of a period of low volatility, investors looking for effective hedging methods should go beyond traditional protective assets such as bonds, yen and gold, Goldman Sachs said.
The problem is the lack of assets, which are growing in price against the background of increasing volatility, for example, when the S&P 500 index falls.
No defensive assets or other assets rose in price during the last spike in volatility, wrote Goldman strategists, including Ian Wright, in a March 12 report.
As a rule, bonds provided protection to investors during periods of high volatility. However, now this strategy may not work as well, as central banks curtail quantitative easing and raise rates.
Meanwhile, the US government needs a lot of borrowing. A potential way to hedge risks may be investments in cyclical stocks.
The yen, which was seen as a safe haven in times of market turmoil, may be less reliable because of the Bank of Japan’s determination to continue monetary stimulus.
Gold, another traditional defensive asset, became cheaper in late January – early February amid global stock sales.
“Searching for effective ways to hedge in the cash space will continue to be difficult as interest rates rise,” and the scenario of non-inflationary growth disappears, bank strategists wrote. "Active risk management through transactions with derivatives will become more important for portfolios," they say.
US labor market data released on February 2, indicating an increase in inflationary pressure, triggered market turmoil. US employment growth accelerated in January, while wages grew at the highest rates in more than eight and a half years.
US consumer prices rose more than expected in January. The core inflation indicator showed the highest growth for the year.
Amid signs of increasing inflationary pressure, investors overestimated the prospects for inflation, weighing the implications for monetary policy and asset value.