My FT column this weekend and my Citywire column this week harp on about the same topic – how to diversify your portfolio in case of market turbulence. The idea here is to find genuine alternatives. On Friday I’ll publish my list of main market single stock diversifiers.
But for now, I want to touch on the classic diversifier US Treasuries. Stone X’s iconoclastic strategist Vincent Deluard isn’t quite as convinced as I am that this does represent such a great diversification bet. In a paper to clients form last week he measures each asset’s correlation with the other 93 and awarded a gold medal to the asset with the lowest correlation, silver to the second, and bronze to the third.
According to Deluard “the medal tally is even more unbalanced than that of the Tokyo Olympics: short-term U.S. Treasuries are the most diversifying option for 67 assets. Long term Treasuries got 12 gold and 64 silver medals. Uranium, natural gas, and the Yen were distant thirds”.
But the hold of UST on the top prize looks like it might be slipping. Deluard observes that “…the trailing one-year correlation between the returns of long-term Treasuries and those of the S&P 500 index is close to zero. Long-term Treasuries have lost a cumulative 1.7% on down days for the S&P 500 index since March 2020 and they have lost an average 20 basis points on large equity selloffs days in 2021
The paper is entitled THE IRREPLACEABLE ASSET IS BREAKING DOWN – WHAT TO DO ABOUT IT and the chart below nicely sums up his concerns. Notice how that negative correlation is wasting away in the age of QE.
If UST isn’t such a great diversifier anymore, what the heck is left???
Deluard has two left field suggestions: Japanese utilities and my own favourite, Uranium.
Of Japanese utilities, these “have no correlation with those of Chinese tech stocks and Latin American financials, and their dividend yield is twice greater than 10- year Treasury yields. Second, uranium returns are negatively correlated to oil and copper and commodity-producers and the dejected metal may be ready for a new secular bull market after 15 years of pain”.
And gold ? “ For better or worse, gold is a chameleon asset. Gold can be a hedge against inflation, macro instability, financial repression, the weak USD, and a bet on emerging markets, but these correlations are not stable. Soaring Indian and Chinese demand drove gold prices during the 2000s EM bull market. Gold traded as a haven from financial chaos between 2008 and 2011 before being driven by real rates. Gold has benefitted deeply negative real yields and rising inflation expectations since 2021. Alas, the headwinds of a relatively strong U.S. dollar and weak emerging markets have kept gold prices in a frustrating tug-of-war.”