One of the most crowded deals right now is the ‘Fourth Quarter Crash’ deal. A lot of investors are worried about runaway inflation, which in my opinion is probably not as bad as some think. Arguably, however, a larger group fears the relentless optimism of the US stock markets, which nothing seems yet to be able to derail.
The Delta variant? No worries, just buy tech stocks. Sino-US relations are slipping? No problem, just buy US growth stocks. Valuations using traditional methods that explode? Keep your cool and think about America’s income boom. Optimists may be right, but the likelihood of an upward rebound in market volatility is increasing, compounded in my opinion by China’s crackdown on real estate developers and technology.
Savvy investors will seek to diversify. But in a globalized market where everything seems to correlate, including much of the bond market, this is a difficult problem to solve.
I thought about it and came up with a shortlist of ideas that can be implemented using accessible funds and actions. Basically most of the suggestions, many of which I hold dear, have provided the right kind of diversification over the past few years.
It is easy for an investment to produce diversified, uncorrelated returns simply by being such a terrible investment. In other words, while everything else has gained in value, these have taken the opposite direction. Hopefully most of these alternatives pass this test.
There are two “buckets” of ideas. The former are attractive options fueled by forces that are not necessarily related to the ups and downs of the business cycle. One is the opportunity of the nuclear industry and its difficulties in accessing uranium supplies. Prices have skyrocketed since I last wrote on this, but I think the opportunity is still huge – and almost completely unrelated to fluctuations in the stock market. In my opinion, the easiest way to do this is through the physical uranium owner listed by Aim, Yellow Cake.
Then we have the price of carbon emissions, via a new exchange-traded fund (ETF) from Wisdom Tree. This tracks the price of carbon through the EU Emissions Trading System. This price will be increasingly influenced by political decisions regarding emissions targets and the growing financial interest in speculating on carbon prices. My objective is a price of 100 € per tonne within a few years.
Listed hedge fund BH Macro (now incorporating its former sister fund BH Global) invests in a variety of diversified long, short and macro strategies, all managed by Brevan Howard, an established player in this field. Its record in times of market volatility is excellent, but it has also managed to deliver positive returns even in more bullish markets.
By the way, if you are looking for a simple way to make money during times of heightened market volatility, why not invest in groups like CMC Markets and Plus500, which make big profits from speculative day traders using spread betting platforms? They are both very profitable even in normal times, but when extreme volatility hits the markets their profits soar.
The following three diversifiers are very traditional and hardly need any explanation. Long-term US Treasury bonds seem to me to be a reasonable safe haven, yielding 1.32 percent. Another classic means of diversification is the yen, accessed through a Wisdom Tree fund – a currency tracker long on the Japanese yen and short on the British pound sterling.
Contrary to most ideas in this table, this is a classic ‘hopefully’ safe haven asset that hasn’t actually made much of a profit over the past few years – but if all goes to hell in one. handcart, we can expect a wall of silver to head towards the yen.
My penultimate suggestion is the least surprising of all: physical gold. There are plenty of options, including ETCs, direct online holdings through companies like BullionVault, and a range of app-based products like Glint and Tally. Considering the current geopolitical challenges, investing in Chinese local currency bonds is a very adventurous idea. But renminbi-denominated bonds are one of the few sovereigns to offer positive real returns for a currency that appreciates slowly over time.
My second basket of ideas is more conventional but includes stocks that could provide some diversification. Russian stocks via the JPMorgan fund listed on the London market are arguably the most speculative. The Russian economy is more isolated than it has ever been, with a strong fiscal position, tons of central bank reserves and a reputation as a maverick.
In equities, nothing is more defensive than tobacco stocks, represented here by British American Tobacco (BAT). All mega tobacco companies are now government regulated money making machines and are rejected by many investors, especially those with ESG leanings. Yet in terms of classic fundamentals, there is still nothing quite beating them, except for some big pharmaceutical stocks.
Healthcare is easily accessible through a fund listed at Polar Capital, its healthcare and income trust, which has a prudent mandate to invest in strong, income-generating large caps. I think this healthcare fund will likely be a bit more volatile than tobacco stocks, but long-term demand drivers are unlikely to be derailed by a sudden market panic.
There is also an extremely speculative idea in this first bucket of alternatives: KR1 listed on Aquis. I have carefully avoided mentioning anything related to bitcoin or crypto. I am not convinced that these digital currencies will thrive in times of intense market turmoil. For me, they have become an alternative to owning meme stocks or tech growth stocks.
If I’m wrong, the crypto will explode if it crashes. But this boom would also benefit the emerging world of decentralized finance. This is the goal of KR1, a listed crypto venture capitalist, which is essentially a leveraged crypto game that becomes even more common during a stock market crash. It is absolutely not recommended for defensive investors. But as an ‘outside’ alternative diversifier, it’s worth considering – for the real adventurer.
David Stevenson is an active private investor. Among the securities mentioned, he holds interests in Yellow Cake, ETFS Carbon, BH Macro and KR1 and holds physical gold. E-mail: [email protected]. Twitter: @advinvestor