The strategic role of gold in the portfolio of Singapore-based investors
Singapore is home to a wide range of cultures, religions and ethnicities but its diversity is not limited to its people. Attracted by the city-state’s pro-business environment and highly skilled workforce, asset managers and investors from around the world have come to regard Singapore as the gateway to ASEAN and the Asia Pacific.
According to the Monetary Authority of Singapore’s 2020 Asset Management Survey, 78% of the funds managed in Singapore were sourced from outside the country. Of the funds managed, 68% were invested in Asia Pacific, while ASEAN countries also remained key investment destinations, making up 33% of the investments in APAC.
The typical Singapore-based investor is thus presented with the risks and challenges associated with an APAC-focused portfolio that includes sizeable exposure to emerging market (EM) Asia assets.
The role of gold in an APAC and ASEAN-heavy portfolio
The performance of gold and EM assets has historically been linked to the direction of the US dollar.
EM economies tend to have debts denominated in US dollars and many require foreign inflows to fund fiscal and/or current account deficits. When US interest rates are high and the dollar strong, EM economies run the risk of incurring higher borrowing costs. Furthermore, capital outflows can place EM assets under pressure.1
At the same time a stronger US dollar diminishes gold’s attractiveness as an alternative store of value and can render it more expensive in other currencies, leading to a decline in demand.
Gold and EM assets thus share a small but positive correlation through their relationships with the US dollar. However, this positive correlation is not consistent across all market environments, especially during periods of market turmoil, and gold can continue to play an important role in a portfolio that is heavily weighted towards EM Asia assets. (Chart 2)
A positive correlation that works
The positive correlation between gold and EM assets extends beyond their shared relationship with the US dollar, especially over the long run. In EM Asian countries where there is a high affinity for gold as jewelry and investment, economic growth is a key driver of gold demand. In India, our analysis shows that for every 1% increase in income, gold demand is expected to increase by 0.9%.2 Likewise in China, gold consumption is closely linked to local economic performance and the 8.1% y-o-y GDP growth in 2021 was seen as key in supporting the 55% y-o-y rise in Chinese gold consumption.3
ASEAN investments similarly have tremendous potential for growth due to demographic and economic trends and play an important role in asset allocation as a source of return. However, these investments usually carry risks and come with higher volatility. Gold’s link to rising income means that it can capture ASEAN’s growth upside without the accompany risk and volatility and thus improve portfolio performance.
A safe-haven counterweight to risky EM assets
Gold and EM Asia assets may share a small but positive correlation through their relationships with the US dollar. However, this correlation is not consistent across all market environments. During periods of systemic risk when the US dollar and Treasuries tend to rise and global equities decline, gold similarly benefits from “flight-to-quality” inflows and can rise alongside a stronger US dollar. (Chart 2)
In a portfolio that is heavily weighted towards EM risk assets, gold’s role as a safe haven is particularly pronounced. EM equities have a beta of 1.14 versus the MSCI World Index,4 and systemic risks that impact global economies can have a larger effect on emerging markets.
In addition, many EM economies are also exposed to risk stemming from domestic political instability and EM Asia is no different. In Southeast Asia, domestic social unrest in Thailand,5 a military coup in Myanmar and political volatility in Malaysia are examples of events that can weigh on domestic bonds and equities. In addition, volatility in risk assets can be instigated by political elections and several are due in the near future: Philippines (9 May 2022), Malaysia (before July 2023) and Thailand (before Q1 2023).
Gold is devoid of the political risks embedded in EM assets and can protect the portfolio from depreciating local currencies, as well as offset the decline in risk assets during periods of instability. But gold’s correlation does not just work for investors during periods of turmoil. It can also deliver positive correlation with equities and other risk assets in positive markets, making gold a well-rounded efficient hedge with high efficacy and low cost (Chart 2).