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Gold makes best hedge amid US-Iran flare-up, strategists say

With uncertainty on how the US-Iran conflict will unfold, analysts are standing pat on their equity calls for the year

Iran's retaliation for the death of its top Iranian commander was swift, but somewhat underwhelming to many quarters. Consequently, markets opened in the red but clawed back losses.


IRAN'S retaliation for the death of its top Iranian commander was swift, but somewhat underwhelming to many quarters. Consequently, markets opened in the red but clawed back losses.

Equity strategists told The Business Times that though it's too early to change their outlooks for the year, they expect continued volatility, with gold a favoured hedging tool.

UBS Global Wealth Management's APAC regional CIO Kelvin Tay said: "The recent rise in geopolitical tensions underscores the importance of global diversification and reinforces our view that safe havens, like gold and the Japanese yen, can be used to reduce portfolio volatility."

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With US Treasury yields "already very low" and having limited upside, HSBC Private Banking's global chief market strategist Willem Sels said the yellow metal makes a best tail risk hedge. "Gold prices could still rise. So that's why we continue to keep it as a tail risk hedge," he added, speaking to media at an investment outlook briefing on Wednesday.

With regard to US-Iran tensions, BNP Paribas Asia head of FX Shafali Sachdev believes gold makes a better hedge than oil.

The latter, like gold, saw prices jump after last Friday's US airstrike in Baghdad on Qasem Soleimani, the slain Iranian general.

If future attacks by either the US or Iran do take place, Ms Sachdev cautioned, it is uncertain how they might occur. If there are attacks on oil facilities or a cut in supplies, prices might spike only for a short while as there is still ample supply. In that case, oil might not be the best asset, she said.

With spare capacity in oil remaining adequate, UBS's Mr Tay is of the view that Brent prices will struggle to hold above US$70 per barrel in the first half of 2020.

"This proved to be the case last September when a Saudi refinery facility was attacked," he said.

With the sense of uncertainty over how US-Iran tensions could unfold, strategists are standing pat on their equity calls for the year.

As it stands, the global economy is continuing along the path of recovery and central bank policy remains accommodative - both of which are supportive of equities.

While tensions between the US and Iran are likely to continue, UBS's Mr Tay said the wealth manager's base case "does not assume significant and serious escalation" as both parties prefer to shy away from a broader military conflict.

"The recent Iranian attacks on US bases should have a limited and temporary effect on financial markets," he added.

As such, the effects on earnings on a global scale are likely to be minor, which is why UBS is maintaining its overweight positions on both global and US equities.

HSBC's Mr Sels noted that forecasts will not be changed just yet as the longer-term investment outlook remains intact.

HSBC is overweight on US and UK equities among developed markets. In Asia, it is overweight on Indonesia.

On Wednesday, Iran's missile attacks on two US bases in Iraq caught investors out of the blue, with equities taking a beating.

Interest in safe haven assets picked up, with spot gold prices hitting a seven-year high of US$$1611.50 per ounce during the Asian session.

Brent, the global global crude benchmark, breached US$71 per barrel.

But nerves calmed and markets recovered some losses after US President Donald Trump claimed that "all is well" and Iranian Foreign Minister Javad Zarif said that Teheran does not seek escalation or war but will defend itself against American aggression.

In North Asia, Japan's Nikkei 225 shed 1.6 per cent, China's Shanghai Composite fell 1.2 per cent, South Korea's Kospi tumbled 1.1 per cent, Hong Kong's Hang Seng dropped 0.8 per cent and Taiwan's Taiex closed 0.5 per cent lower.

Elsewhere in the Asia-Pacific, Malaysia's key gauge lost 1.4 per cent, Australia's ASX 200 fell 0.1 per cent, while in Singapore's Straits Times Index closed 0.1 per cent down.