There are very little major shares on the ASX/S&P 200 (XJO) that still meet a dictionary definition of good value. Most shares are mathematically overpriced compared to historical averages by significant margins. Whilst there is plenty of cash flowing in the investing world, and investors are looking for somewhere to put cash, there is still cash flowing into shares – despite mounting risks.
In the US, a treasury yield curve inversion has indicated a potential coming recession, economic data has started to trend lower, and the US-China trade war appears to be hurting both nations – despite a brief respite last week. In Europe, economic stagnation is continuing despite ever more expansionary monetary policy.
“Large-cap valuations are high, not in bubble territory, but if we do stumble into recession over the next year, which I think is likely, I think we’ll see below 2,000s on the S&P,” said Doug Ramsey, chief investment officer of Leuthold Weeden Capital Management. Currently the S&P 500 sits around 3,000 points.
Domestically, our own fundamentals have deteriorated substantially as well, economic growth is extremely weak, wage growth is absent and only a series of cuts to record low interest rates seem to be keeping our head above water.
This cutting of interest rates is a feature of western monetary policy now at the moment, as central banks do their best to stop a potential economic malaise. Whilst the era of super low interest rates has helped keep economic fundamentals from collapsing, it has also forced asset prices extremely high. This is because the risk-free rate, which is largely governed by official interest rates, is a key variable in asset pricing theories. As the risk-free rate comes down – the valuation of a given risk asset rises.
The increasing economic uncertainty, combined with high risk asset valuations has led UBS to raise their forecast for gold in 2020 to $1,730 USD an ounce, up from $1,680 forecasted last month, which is about 17 percent above the current price. UBS stated that “An environment of negative and lower-for-longer real rates, slowing growth with downside risks, and elevated uncertainty strengthens the case for holding strategic gold allocations.”
With gold currently sitting around $1,490 USD an ounce, that forecast represents a substantial rise on current prices. It also suggests that gold will continue to be considered a safe haven from potential falls in the share market.
If you agree with the possibility of a continued rise in gold, you could buy physical gold. However, there are usually additional costs associated with buying and holding physical gold, which will end up reducing your returns. Instead, you could consider buying a mini warrant on gold, which will give you a leveraged exposure to the gold price without having to hold the gold yourself.
Alternatively, there are plenty of attractive ASX listed gold companies with world class gold mines.
Sam Green is the Portfolio Manager at Emerald Financial, whilst also being an Equities and Derivatives expert for his clients at TradersCircle.
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