Weekly Buzz: 🌍 How you can hedge against geopolitical risk

09 February 2024

“Hope for the best but plan for the worst” is good advice, both in life and in investing. Recent headlines out of the Middle East have worried investors, with attacks on ships in the Red Sea stoking fears that the conflict could widen and create more instability.

So it’s a good time to consider how these tensions could affect global markets and to make sure your portfolio is built to expect the unexpected.

What’s going on in the Middle East?

A key trade route is already being impacted by conflict in the region. The Red Sea is used for about 12% of the world’s seaborne trade, and weeks of attacks against ships have caused a serious diversion to international trade. Cargo vessels bound for this vital channel now have to be rerouted the long way – around the southern tip of Africa.

And that’s jacked up the prices for transit: the cost of shipping containers from China to the Mediterranean Sea, for example, has more than quadrupled since December last year.

But you probably won’t have to worry about a return of those COVID-era price hikes on the everyday stuff you buy. This time around, the shipping cost surges aren’t coinciding with factory shutdowns and wild demand spikes. Still, inflated shipping costs could offer central banks a new reason to keep interest rates high, which would put a damper on expectations of early rate cuts.

How can you hedge against these risks?

Investors historically turn to safe haven assets to hedge their bets (our Simply Finance section below gives a rundown on this) in times of uncertainty. The price of gold tends to do well during downturns when there’s increased demand.

But the key takeaway is this: while there will always be geopolitical risk, it shouldn’t stop you from investing. Instead, it should remind you of the importance of having a diversified portfolio. To really protect against turbulence, spread your investments across different countries, regions, industries, and asset classes (our General Investing portfolios are a great fit for this!).

💡 Investors’ Corner: The US job market stayed strong – maybe too strong

Data out last weekend showed that the US job market stayed firm in January, news that will heavily influence the Federal Reserve’s (the Fed) next round of decision-making.

US job growth accelerated in January, with 353,000 jobs filled, the largest gain in 12 months. What’s more, with companies continuing to compete for top talent, the average wage in the US has been pushed up a more-than-expected 4.5% year-over-year.

Good news: that means more money in consumer pockets. Bad news: that means they can keep up with higher prices, potentially stoking inflation just when it seems to be calming down.

The Fed has plainly said not to expect an interest rate cut anytime soon. But some investors are thinking otherwise, sticking to their predictions of up to six interest rate cuts this year. But they might want to heed the warning: higher interest rates are wearing down inflation, but with the economy and job market holding up, there’s no reason for the Fed to rush for the scissors.

These articles were written in collaboration with Finimize.

🎓 Simply Finance: Hedging

Imagine you're planning an outdoor party, but there's a chance it might rain. So to avoid the risk of the party being ruined, you also take the time to set up a tent. In essence, that’s hedging.

When it comes to investing, this means making an additional investment to reduce the risk of the first one. If you've invested in stocks, you might also invest in another asset that performs differently during a downturn, like gold. While this doesn’t completely eliminate the possibility of a loss, it can reduce the impact of market swings.

The Lunar New Year has come around again, a time of giving and sharing. But what are some of the ways you can make the most out of your red packet cash?

Our very own Mey Wong, head of client experience at StashAway, takes to the microphone alongside host, Howie Lim, to give their tips in the latest episode of The Business Times’ Money Hacks podcast.

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