Market sentiment in 2022 is weak as worries overflow about the impact of surging oil prices as inflation rises and the Federal Reserve’s policy response, amid upheaval from the Russia-Ukraine war.
Although holding cash may mitigate downside risk for a while, DBS Chief Investment Office believes that holding a substantial amount of cash will only erode purchasing power over time and lead to missing opportunities that heightened market volatility presents as inflation climbs to a 30-year high.
Instead, it recommends investing in alternatives, such as private equity, private debt, hedge funds, and gold for their low correlation with public markets.
Speaking to a media briefing, Hou Wey Fook, chief investment officer, DBS Bank, noted that there have been sustained flows into alternatives since 2016, with the AUM jumping four times to over $1.6trn in 2021 from less than $0.4trn in 2016.
Among alternatives, Hou recommends allocating 33% each to gold and private equity, with the remaining assets invested in private debt (17%) and hedge funds (17%).
The price for the yellow metal has been on the rise since the beginning of the year and DBS believes there are strong tailwinds to drive its price higher to $2,000 by the end of 2022.
While inflation expectations grow and stay elevated due to fears of supply disruption, the Singapore bank also noted that there are growing risks of an economic contraction if the Fed hikes rates and tightens liquidity to combat rising inflation.
“We believe investment demand for gold will continue to stay strong as demand for portfolio hedges rise. Gold, with its uncorrelated attributes and strong liquidity, should prove useful in portfolios as risk diversifiers,” said Hou.
Another popular asset class among alternatives is private equity, which DBS expects to see a trend of sustained flows in the coming years.
“As private companies are less constrained by regulatory burdens, there is a less pressing need for them to deliver short-term performance, and there is no need to file quarterly earnings report to shareholders,” said Hou
“They have greater control and can take a longer-term approach to business growth.”
For investors in growth capital, investing in private companies may have diversification merits and returns exceeding that of listed equity investments, and stand to benefit from having access to a wider investment universe.
DBS recommends investing in growth capital target companies which have established cash generating businesses and are opting to stay private for longer, and that tend to be in fast-growing sectors which expand more rapidly than the broader economy.