Wed. Oct 27th, 2021


One of the busiest trades right now is the “Q4 crash” trade. Very investors is concerned about rising inflation – which in my opinion is probably not as bad as some people think. But probably a larger group is afraid of the relentless optimism in US stock markets, which still can not drive anything in the wheels.

The Delta variant? Do not worry, just buy technical stocks. Relations between China and America? Not a problem, just buy US growth stocks. Valuations according to traditional methods that go through the roof? Stay cool and think about the increase in US earnings. The optimists seem to be right, but the likelihood that market volatility may rise is exacerbated in my view by China’s downfall on real estate developers and technology.

Wise investors will try to diversify. But in a globalized market where everything seems consistent, including much of the bond market, it’s a hard way to crack.

I reflected on this and compiled a short list of ideas that can be implemented with accessible funds and stocks. The most important proposals, which I like a lot, have offered the right kind of diversification over the last few years.

It is easy for an investment to deliver diversified and uncorrelated returns simply as a terrible investment. In other words, while all the others increased in value, it went in the other direction. Hopefully most of these alternatives pass the test.

There are two “buckets” of ideas. The first are interesting options that are driven by forces that are not necessarily related to the ups and downs of the business cycle. One is the opportunity in the nuclear industry and the difficulty of gaining access to uranium supplies. Prices have risen since I last wrote about this, but I think the opportunity is still great – and has almost nothing to do with the stock market’s claims. In my opinion the easiest way to achieve this is through the physical uranium owner who is on target Yellow cake.

Next we have the price of carbon emissions, via a new exchange traded fund (ETF) from Wisdom Tree. It follows the price of carbon via the EU emissions trading scheme. This price will be increasingly influenced by policy decisions around emission targets and increasing financial interest in speculations about carbon prices. My goal is a price of € 100 per tonne within a few years.

Listed hedge fund BH Macro (which now includes its old sister fund BH Global) is investing in several diversified long-, short- and macro-strategies, all managed by Brevan Howard, an established player in this space. Its record in times of market volatility is excellent, but it has also managed to achieve positive returns, even during more bullish markets.

On the other hand, if you are looking for a simple way to make money during periods of increased volatility in the market, then why not invest in groups like CMC Markets and Plus500, which make huge profits from speculative day traders that are scattered do not use betting platforms? They are both very profitable, even in normal times, but when extreme volatility hits the markets, their profits rise.

The following three diversifiers are very traditional and need almost no explanation. Long-term U.S. Treasury bonds seem to me a fairly safe-haven asset, yielding 1.32 percent. Another classic diversifier is the yen, which is accessed through a Wisdom Tree fund – a currency tracker that is long the Japanese yen and the short British pound.

Unlike almost all the ideas in this table, it’s a classic safe haven of ‘if everything goes wrong’, which has not made much profit in the last few years – but if everything goes to hell in a wagon, we can expect a wall of money to go to the yen.

My penultimate proposal is the least surprising of all: physical gold. There are a number of options, including ETCs, direct online ownership via outfits like BullionVault and a range of app-based products like Glint and Tally. Given 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 that offer positive real returns from a currency that increases slowly over time.

My second basket of ideas is more conventional, but consists of stocks that can offer some diversification. The most speculative is probably Russian equities via the JPMorgan fund listed on the London market. The Russian economy is more isolated than it has ever been, with a strong fiscal position, numerous central bank reserves and a reputation for bad thinking.

In stocks, there is nothing more defensive than tobacco stocks, represented here by British American Tobacco (BAT). All the mega-tobacco companies are now government-regulated money-making machines and are avoided by many investors, especially those with ESG tendencies. But as far as classic principles are concerned, there is still nothing that surpasses them except a few major pharmaceutical stocks.

You can easily access healthcare through a listed fund from Polar Capital – its Healthcare and Income Trust, which has a prudent mandate to invest in solid, income-generating large-cap investments. I think this health care fund will be a little more volatile than the tobacco supply, but the long-term drivers of demand are unlikely to be derailed by a sudden panic panic.

There is also one extremely speculative idea in the first bucket of alternatives: on the list of Aquis KR1. I carefully avoided mentioning anything related to bitcoin or crypto. I am not convinced that these digital currencies will flourish in a time of intense turmoil in the market. To me, they have become an alternative to owning meme stocks or technology growth stocks.

If I am wrong, crypto will grow into an accident. But the boom would also benefit the early stages of decentralized finance. This is the focus of KR1, a listed crypto venture capitalist, which is essentially a utilized game that crypto is becoming even more mainstream in a market crash. It is absolutely not recommended for defensive investors. But as an ‘out there’ alternative diversifier, it’s worth looking into – for the truly adventurous.

David Stevenson is an active private investor. Among the listed securities, he has interests in Yellow Cake, ETFS Carbon, BH Macro and KR1 and owns physical gold. E-mail address: adventurous@ft.com. Twitter: @advinvestor





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