Investors should stay pessimistic and safe in the coming year

Is 2015 the year of the safe haven? Peter Cooper says this is a year for risk aversion.

Renewed volatility in global financial markets and the 50 per cent crash in the oil price will not have been lost on investors in planning their portfolios for this year. My own view is that this is a year for risk aversion and to seek out safe havens.

Staying invested in most of the major asset classes that have done well since the global financial crisis is not going to be a very good idea, and could be disastrous. You need to diversify both in terms of geographical spread and asset class to beat what could be one of the most memorable years for investors since 2008.

In the Middle East, the UAE is the obvious safe haven. Its economy balances the oil wealth of Abu Dhabi with the commercial flair of Dubai. It is notable that Dubai gained new residents and investors as the regional safe haven during the chaos of the Arab Spring. Those fleeing Western financial markets, and any further troubles in the region, could bring their cash here again.

Oil revenue will most likely be sharply down in the UAE this year, but the governments have pledged to keep their spending steady – or actually rising by nine per cent, in the case of Dubai. Just as the wealth of Abu Dhabi came to Dubai’s rescue in the debt crisis of late 2009, the UAE federation’s immediate future is underpinned by its vast sovereign wealth funds and foreign-exchange reserves.

That said, a slowdown in the success stories of recent years – trade, tourism and transportation – will not be good news for a stock market that has risen like a rocket to the moon over the past couple of years and now seems on a re-entry trajectory. Real estate prices may benefit, as the money coming out of the stock market will have to go somewhere to earn a return, and the fall in house prices should be far less than in the slump of 2009.

For geographical diversification, Switzerland is the traditional safe haven for Europe and the US dollar will remain the currency of choice as the least-ugly of the bunch. The Russian rouble collapsed last year as a petrocurrency with a geopolitical problem. The Japanese yen was also notably weaker and could be the next big loser in the currency wars being fought by the global central banks.

Some investors see Japan and China as opportunities for this year, a view not generally shared by their own people, who may know best. Chinese stocks have zoomed up recently, but this looks like another 2008 Dubai-style stock market bubble waiting to pop. It’s no safe haven and is a place for nimble-footed traders only.

On the other hand, if this is going to be the year of the safe haven, that implies it is not going to be a great year for traders. Volatility can make them rich. It can also make them poor rather quickly, and it did not work for many hedge funds last year that got the oil price direction hopelessly wrong. Day traders in the falling UAE bourses are also gradually being wiped out. Why risk it? Cashing out and going into safe-haven assets is the best policy when markets go wrong. Come back later when the dust has settled for some bargain hunting.

The classic safe-haven asset is gold, and by extension its more volatile sister precious metal, silver. You may have heard gold was a loser last year. Actually, against the US dollar it was the highest-performing currency in the world. Gold protected value better than anything else except the US dollar.

Where gold could behave differently this year is that dollar volatility may return with a vengeance. A US stock market correction is on the cards, with the longest rally since 1929 and 2000 now at an all-time high and valuations only exceeded by the crash years of 1929, 2000 and 2007. Nothing goes up forever.

Any US market correction would first boost the dollar, as the selling of stocks increases demand for the dollar temporarily. After that there would be a reaction in the other direction, with foreign investors taking their money back home. It sets the US dollar up for a rollercoaster ride, and gold could be a major beneficiary and emerge as the top currency and No1 safe haven for this year.

Sticking with safe options may be your best option this year.

Peter Cooper is the editor of ArabianMoney.net

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