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Investors should add fewer bonds and more commodities to their portfolios to capitalize on a time of rising geopolitical tensions. That's what credit analyst Zoltan Pozsar writes in a new Market Commentary for Credit Suisse. He foresees more de-globalization and increasing (economic) warfare in the coming years, with the result that countries will invest more in their own industry and infrastructure. And that requires a lot of raw materials, while little has been invested in them in recent years. Investors focused more on technology stocks than commodities. What does this mean for the investment portfolio?
Last April, Pozsar wrote that we are witnessing the birth of Bretton Woods III, a new monetary system in which the U.S. dollar will depreciate against commodities. He outlined a scenario in which countries will designate raw materials as strategic assets and thus invest more money to secure these resources. Pozsar describes the most important commodities for the coming years as yellow, black and white gold, by which he means gold, oil and lithium respectively. Gold as a monetary reserve, oil to keep the economy going and lithium for the transition to alternative energy sources. The demand for these raw materials will continue to increase in the coming years, while the security of supply will decrease due to geopolitical tensions and trade barriers.
The fact that key raw materials and industries can be subject to sanctions and protectionist measures was demonstrated by several events of 2022, such as the embargo on Russian oil by the EU, the US blockade of Chinese technologies, the Chinese naval blockade of Taiwan and the US import restrictions on European electric cars. Last year, we also witnessed the freezing of Russian currency reserves by the G7, an unprecedented sanctions measure that is fitting for an economic war. And then we haven't even mentioned China's plans to sell Middle Eastern oil no longer in dollars, but in yuan checkout. Or a scenario in which Russia oil in gold will settle in an attempt to undermine the dollar.
According to Pozsar, we can expect to see more developments like this in 2023. He expects further expansion of the BRICS as an economic power bloc vis-à-vis the Western world and foresees that more countries will introduce digital central bank money (CBDCs). The geopolitical dimension of this is often overlooked. In his analysis, Pozsar refers to the mBridge project of the Bank for International Settlements (BIS). This is an alternative payment system that makes it possible to make international payments through CBDCs. This infrastructure can become an alternative to the monopoly of the US dollar and SWIFT in global payments. It could cause countries to pay more in their own currencies and thus hold fewer dollar reserves. That means other countries will buy fewer U.S. Treasuries, making it harder for the United States to finance its deficits. This may be accompanied by higher interest rates.
Like Pozsar in August, streak it is now much more important for investors to understand the game of politics and geopolitics than to follow the monetary policy of central banks. In his latest analysis, he comes up with concrete tips that investors can consider. For example, he recommends replacing the traditional investment portfolio with 60% shares and 40% bonds, because it would not offer sufficient protection. Last year, this traditional portfolio lost about 17% of its value, as both stocks and bonds fell in value due to rising interest rates.
Pozsar outlines an alternative investment portfolio with 40% in equities, 20% in cash, 20% in bonds and 20% in commodities. He expects that raw materials will benefit after years of underinvestment, especially if countries start to build a war economy and invest more in their own industry and infrastructure. According to him, this applies not only to oil and gas, but also to other raw materials such as lithium, copper and cobalt. Gold also remains interesting, because historically it has performed well in times of crisis and high inflation.
It is striking that Pozsar recommends 20% of the portfolio in cash despite skyrocketing inflation. The reason for this is that cash now yields a positive return and that you can take advantage of opportunities in the market. By cash, Pozsar means short-term government bonds, the value of which fluctuates less with rising or falling interest rates. As large investment funds in cash In effect, this means that they hold the most liquid short-term government bonds. For a small investor, it is sufficient to keep a buffer in the investment account or savings account. By keeping some powder dry, you can buy more at a favorable time, because in an economic crisis, cash is still king.
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On behalf of Holland Gold, Paul Buitink and Joris Beemsterboer interview various economists and experts in the field of macroeconomics. The aim of the podcast is to provide the viewer with a better picture and guidance in an increasingly rapidly changing macroeconomic and monetary landscape. Click here to subscribe.
