Investors prefer cash as safe havens no longer secure


SAFE havens including gold and bond yields aren’t safe anymore from the global market sell-off, or so it seems, as investors are opting for cash amid the alarmingly rapid transmission of Covid-19 worldwide and falling oil prices.

Spot gold fell 0.5% to US$1,493 per troy oz at press time yesterday, after rallying to as high as US$1,680.47 (RM7,469.35) per troy oz on March 9, 2020.

US Treasury yields also fell to an all-time low of 0.318% two weeks ago, following the US Federal Reserve’s decision to make an emergency cut in its lending rate to 0.25%.

In such trying times, investors prefer to hold on to their cash, Fortress Capital Asset Management (M) Sdn Bhd investment advisor and director Geoffrey Ng said.

“Most investors and fund managers are actively taking risks off the table and staying on the sidelines as uncertainty continues to permeate in terms of the economic impact and how long the pandemic will last.

“A defensive posture is definitely advised, until we can we see a clearer path of the pandemic subsiding and the world economy going back to normal,” he told The Malaysian Reserve (TMR).

He said almost all asset classes exhibit increasing similarity of return behaviour in times of significant uncertainty, particularly a pandemic like Covid-19 where the potential human, economic and political fallout and the longevity is unknown.

The recent weakness in gold prices is likely due to the sudden rush by investors taking their money off the table by selling their risk-based financial assets.

A very large part of gold trading now is in the form of investments in exchange-traded funds, futures contracts and other derivatives, which likely explains the short-term weakness in gold prices and sentiment.

Corporate and high yield bonds are negatively impacted by expectations of greater stress on corporate operational performance and balance sheets as the economy deteriorates, Ng added.

This leads to higher credit risks and therefore, lower corporate bond prices and reduced returns.

Government bond yields have come down significantly due to dramatic reductions in interest rates to try and stem lower economic activity resulting from the pandemic, which has caused the government bond market to do well.

“Usually, government bonds and gold would benefit from uncertain environments,” Areca Capital Sdn Bhd CEO and ED Danny Wong told TMR.

“However, the panic situation and weak sentiment are driving many to hold on to cash. The irrational selling caused prices to plummet.”

Wong pointed out that during the Sept 11, 2011 attacks, assets still reflected their underlying value once the dust had settled.

“For the short term, assets remain volatile but if we use China’s experience (as a basis), markets would recover within weeks.

“For now, we keep monitoring asset prices and the situation closely, and bottom-fish for good fundamental assets which have been oversold,” he said.

AxiCorp Financial Services Pte Ltd chief market strategist Stephen Innes said investors are starting to hunker in for the long haul, hence the need for cash takes precedence as they plan for sunnier days.

“Gold prices have been falling due to investors selling gold to cover margin calls on equities. There is a psychological trade setting in that investors want to belong in the safety of cash, which indicates how bad things are getting when no asset is safe from the Covid-19 sell-off,” he said.

He added that the equity market positioning by fund managers has been pared dramatically as they too are moving into cash.