- Fed rate hikes, war in Russia, and soaring energy prices have rattled stocks, cryptos, and bonds this year.
- Macro Hive’s Bilal Hafeez explained how investors should position themselves for this period.
- Silver and commodities might be the best investments, he says.
The era of the Fed’s ultra-loose monetary policy has begun to unfold, and investors are debating how best to position themselves for a series of rate hikes this year and next.
The U.S. central bank raised its benchmark interest rate by 0.25 percentage points last week, and Chairman Jerome Powell signaled more aggressive increases were on the way. If the Fed raises rates at every meeting this year, including an expected 50 basis point hike at its May and June meetings, that would translate to a full two percentage points of increases in 2022.
On top of that, markets are grappling with the fallout from Russia’s invasion of Ukraine and the stark reality of outrageously high energy prices that are often associated with global recessions.
Bilal Hafeez, Head of Research at Macro Hive, told us how investors should organize their portfolios so that a big drop doesn’t significantly reduce the value of their overall investments.
Hafeez is a former global head of strategy at Nomura, and a former head of multi-asset research and advisor to the CEO of Deutsche Bank.
He explained what Macro Hive’s investment preferences are when the Fed raises rates:
- Underweight bonds and stocks, and Overweight cash and goods.
- Modestly long crypto (adjusted for volatility, it underperformed less than stocks)
- In US stocks, Overweight homebuilders, large cap, reopening of trades, semiconductors and financials (medium term), underweight large cap growth and retail.
- In European equities, Overweight financial.
Allocations to cryptocurrency should be made strategically, he believes.
“Recognizing that crypto has much larger swings than stocks suggests that your crypto positions should be lower than your stock exposure,” Hafeez said.
“But more important than sizing is recognizing when the market is in a fragile state, with a much higher likelihood of big losses. That time has come.”
Markets took note of geopolitical tensions and energy price shock, Hafeez said, noting stocks were down 6% this year, crypto down 8% to 16% and bonds down from 5% to 10%. Only commodities are up this year – a whopping 39%.
He noted that these asset classes experience different price movements, so returns can be adjusted based on
For Hafeez, cash and commodities might be the best investments right now.
“Therefore, despite all the talk that because of low yields, cash is a wasted investment and will not outperform inflation, nor will it cause you to lose face value,” he said. .
“Better to be flat than to lose 5-18% on bonds, stocks and crypto. This also suggests that in inflationary environments, cash, along with commodities, may end up being the best investment as the liquidity limits your losses and allows you to survive.”
This recommendation is very different from that of hedge fund investor Ray Dalio, who called cash the “worst investment” as recently as December.
The chart below shows that bonds have been the worst performers in the current market cycle, followed by stocks and then crypto.
Read more: Barclays explains why the Fed’s hawkishness will end the long-term stock market rally – and lists 7 investment sectors that will continue to perform in a low yield environment