The strategic way to play the gold & oil theme

In a highly dynamic world, the conventional diversification strategy adopted by an investor, like buying different sector stocks, perking up debt allocation or increasing cash allocation, are not yielding the desired results. The reason—converging correlation of different assets and fading benefits of diversification.

For instance, on the year-to-date basis, cyclical like banks and defensive like FMCG are among the top performing sectors. On a geographic level—correlation of US and Indian equities are increasingly rising, while on the currency side, Japanese Yen, once considered as a ‘safe’ haven for currency trades, has become one of the most volatile currencies this year among the developed markets. The Yen touched a two-decade low level with the US dollar. 2022 was also when many developed country currencies behaved similarly to Emerging Markets, dropping 12-20%.

Global diversification helps hedge your returns
So, how does one hedge their portfolio return at a time when unabated inflation has pushed several global central banks to continue their hawkish stance despite a steep hike in interest rates over the last one year. One of the alternatives is an unconventional way of diversification – like investing in global gold and energy companies—a set of sectors rarely chosen by domestic investors when looking at investing in companies that are beyond the borders but which can add-on the benefit of geographical diversification.

Let’s understand why global diversification is important. India's total market capitalization is around $3.5 trillion, a mere 3.5% of the world’s market capitalization. So, adding the global equities to one’s portfolio not only opens a wide investable universe. Historical analysis shows, every year the world topper, in terms of market return, keeps changing. For example, in 2022, commodity export nations such as Brazil and Indonesia were the top gainers, while in 2021, it was the US, Switzerland, India and France.

This shows that no market performs consistently each year. . Therefore, adding global companies to the portfolio allows the local investors to diversify their investments and exposure. Given our home bias for investing in familiar places, global diversification typically becomes a tough wall to climb. However, this fear can be easily allied with the fact that many products used in our daily lives such as gold, chips, computer operating systems and crude oil are all produced by global companies.

Why bet on global metal and energy stocks?
Even while an investor considers adding global footprint to its portfolio, they mostly don’t go beyond the US tech companies, which tend to occupy a large mindshare of local investors. Given that a large part of the daily screen-time is linked to some of the products by the US tech companies, their stock levels had reached stratospheric levels before the recent stock market crash. So, when an investor is looking for a global diversification beyond the US tech stocks, which is safe yet varying thematically, investors should look at the global metal and energy sector.

The global metal and energy segment in the current environment is an oasis to play the commodity theme. There are a few reasons why this theme is an attractive investment avenue for Indian savers. Firstly, India has consistently been one of the world’s largest importers of oil and gold, contributing nearly 40% of India’s imports. Secondly, both these commodities are denominated in the US dollar hence weighing on the Rupee movement. Thirdly, the global economies, over the last decade, have expanded their balance-sheets manifold thereby increasing liquidity, leading to the rise in economic activity’s pace as well as higher inflation, all of which bode well for the metal and energy space. Lastly, the valuation of global metal and oil companies are very attractive as they are trading at 2-4 times of book-value, while the tech companies’ book-value have reached double digits.

One of the easiest ways to access this theme on a global scale is by investing in a fund which has a portfolio built on gold and oil stocks. Taking into consideration the significant opportunity provided by the theme, one of the leading fund houses has an offering based on this theme. The allocation in such a scheme is adjusted based on a variety of factors such as the correlation of currency factors and sectors and several others. Given that the portfolio is thematic in nature, it offers a prudent option for a savvy investor.
Disclaimer : This article is authored by Joby John, Partner at The Summit Capital. The opinions expressed are those of the author and do not necessarily reflect the views of Business Insider India.