GFC MKII Part III


Hello again and welcome to the final instalment on our gripping (yet terrifying) introduction to the next financial crisis. As we’ve already stated in the thrilling Part I and the emotionally harrowing Part II, we can’t be sure that the crisis will happen as we described or even if it will happen at all. But just saying, the global economy is a very complex beast and has been looking awfully shaky as of late. So now we turn to the part you’ve all been waiting for, and that’s what to invest in should the shit hit the fan. Most of you will be quite wary of the need to hedge (or insure) your portfolio should the global economy enter crisis mode, so here’s a few suggested ways to do just that. If you don’t feel the need for portfolio hedging in these turbulent times than BLI wishes you well, and hopes that you aren’t directly responsible for anyone else’s money.

Gold:

If you read last weeks post you’ll know exactly where this is headed. Gold has been part of the global monetary system for a long time, and can lay claim to being one of the oldest currency forms used by humans. Gold does very well in times of market crisis as seasoned investors know that central banks start to acquire more gold to conduct international trade or secure their currencies if everything else fails. For that reason rises in the price of gold accompany periods of market volatility, reflecting the increased desire for the safety of the yellow metal when people fear other assets will weaken. Gold also has the added bonus of being drastically revalued upwards should the US return to a gold standard, or if the Chinese economy start to contract. The one drawback of gold is that it’s hard to buy and store in physical form. Dealers such as the Perth Mint will sell you bullion and coins after appropriate background checks, however you probably aren’t too keen on copping the nickname “Smaug” as you horde a stash of shiny metal in your bedroom. The ETF ASX:QAU (BetaShares Physical Bullion) allows you to “own” a share of physical bullion held by the fund in London vaults, and is as easy to trade as any other ASX equity. Graphed below is the price of ASX:QAU since things started going south on the ASX. Basically, as the ASX goes down, QAU goes up.

GoldBaby

An ASX Hedge ETF:

You probably already know that investors can place bets on the direction of a market or stock by trading options and futures, which reward the buyer (or seller) depending on whether the price of that stock, market or commodity goes up or down. It’s a risky business, as it can leave you exposed to massive uncapped losses should the price of the asset move in a way you didn’t expect. Options, futures, CFDs and many other exotic products are usually behind the most obscene Wall Street profits as well as the most unbelievable losses. Lucky for you there’s another BetaShares ETF (ASX:BBOZ) ready to do the dirty work for you, by making bets against the prices of major ASX listed equities on your behalf. The ETF owns assets that increase in value as the ASX falls, and decrease as it rise. The ETF is aptly named the BetaShares Big Bear fund, ironic as a bear market is defined loosely as a 20% fall from a peak (right where the ASX is hovering now). So owning ASX:ETF makes you cash as the ASX index falls, while ensuring the most you can lose is the price you paid to buy the ETF units (as opposed to unlimited losses that are possible depending on the options product traded). See below for the stellar performance of ASX:BBOZ since the start of the year.

BigBear

Undeveloped Land:

This one is slightly out of left field, but let us elaborate. What happens to house prices in a global financial crisis? Please feel free to go watch “The Big Short” for a detailed analysis of this issue. To summarise, the economy tanks, people lose their jobs, mortgages are left unpaid, houses are vacated as banks evict residents, housing supply exceeds demand and eventually every property investor suffers. However, when the economy finally starts to recover many businesses and individuals find it more attractive to invest in undeveloped land for their private and commercial purposes as it will generally be cheaper than purchasing and re-purposing developed land. This is a subtle point, but the first houses to get sold after a crisis are usually the cheap ones built on new land in emerging estates, as they’ll generally undercut the average prices of those in established suburbs. Try comparing house prices in Craigieburn and Coburg for a great example of this point, and ask yourself where you’d be likely looking for a new place if you’d lost yours in a crisis a few years ago.

So there you have it, a few sweet ideas for your own happy hedging. Even better, if you subscribe below you can get great articles like this FREE a few times a week, straight to your inbox. Our email game is strong, we swear.