MENA (Middle East and North Africa), once a forgotten or unfamiliar “oasis” for a lot of investors, has truly grabbed the world’s attention. Stock Markets growth seemed to have stalled with growing concern over the uncertainty of oil prices caused by the regional unrest which started in Egypt.
The general misconception is that, asset allocation or diversification will reduce the investment return, or yield. The events of the past month remind us again, just how fast your 6 months’ gain can be wiped away in days.
So what can you do to protect your investment portfolio?
We have to first understand the global problem we are facing:
- Oil: Turmoil in MENA causing spike in oil’s price, which may hurt global recovery
- Food: Soaring food prices raise inflation concern
- Debt: Euro Debt Crisis (This is not over yet, although neglected in recent news headlines)
- Money Flow: Money seems to have flown back to US and Europe, which causes divergence between US Equities and Asia Equities. (Is it due for a correction?)
To tackle these problems, there are certain assets you should own in your portfolio. Below are just some of my quick thoughts.
Please note that as the specific investment objectives, financial situation and the particular needs of individual investors may differ, you should consult your own financial adviser for professional advice.
In a world of rising prices, consumers become poorer and net wealth is transferred to producers. From the Asset Allocation point of view, investors should own what others need to buy.
You can invest in commodity equities, or in the underlying assets themselves.
1. Resources Equity
- Short term wise, Energy Production Companies may benefit the most from tensions in MENA when oil price soars; Investors should avoid Energy consumption companies like airlines or transportation companies.
- Being the safe heaven as always, gold rebounded to $1400, which can potentially increase the profitability of Gold Mining Companies.
2. Agriculture Equity
- Food prices drive up agriculture equities like Fertilizer Producers. However, as the agriculture commodities are rather seasonal and short cycled, not all agriculture equities will benefit from rising food prices and some may even be hurt badly when the market reverse.
3. Commodity Derivatives:
- There are certain Futures, Mutual Funds or ETFs investing directly into commodity indices. They benefit directly from rising prices of the underlying commodities.
- This removes the unsystematic risk from the commodity-based companies, but may increase exposure to others risks like Counter-party Risk, Contango Effect, etc.
Volatility Index (VIX)
Known as the “fear factor”, VIX has strong inverse relationship with S&P 500. Since S&P has run up for quite a few months and everyone is expecting a correction due to the MENA unrest, investors can use VIX to hedge sudden crash of the stock markets.
However, VIX is a highly complicated investment instrument and investors should be very careful when investing in VIX-related products such as futures or ETF.
Money Market Funds
For the risk-averse investors, instead of staying away from investment, they should consider Singapore Dollar Dominated Money Market Fund instead of Cash. These instruments typically invest into short duration debts, which offers very low volatility with steady return (3%-5%).
Remember, not investing is a risk in and of itself.