Gold remains an important risk hedge with equities at record levels - Morgan Stanley
(Kitco News) - With U.S. equity markets hitting record levels on a daily basis and the growing threat of inflation sharply rising, investors might want to look at gold as a portfolio hedge, according to a senior bank executive.
In a recent telephone interview with Kitco News, Katerina Bakh Simonetti, CFP senior vice president, private wealth advisor and portfolio manager at Morgan Stanley, said that although gold prices have struggled in the last seven months, the precious metal still plays an important role in a portfolio.
"The main story is that the economy is improving. We are benefiting from historically unprecedented stimulus," she said. "But this good news also brings certain pressures. Specifically, we are concerned about balance sheets and the overall budget deficit. There are a number of things that could potentially lead to higher inflation and also put pressure on the U.S. dollar. And these pressures can create opportunities for commodity, specifically gold."
Although Simonetti remains bullish on U.S. equities, she also noted that it would be prudent for investors to take some defensives positions in their portfolio because of current valuations. She added that gold remains an attractive safe-haven asset as real interest rates remain near historically low levels.
With the U.S. economy expected to see strong economic growth this year, as some analysts are forecasting 6% growth, Simonetti said, fundamentally, equity markets have room to go higher.
Simonetti's bullish outlook on equity markets comes as both the S&P 500 and the Down Jones Industrial Average saw their fourth consecutive week of record highs Friday.
"The growth that we are seeing in equities is not happening in a vacuum," she said. "It is supported by the stimulus, but it's supported by the earnings and it's supported by the fact that global economies are reopening. So yes, we do believe that there is some more growth left in the market, but it is coupled with volatility," she said.
While gold remains a defensive asset in a portfolio, Simonetti said investors could also look at other commodities like copper and oil as part of a diversified approach to the global recovery and growth story.
"Commodity is like energy and industrial metals have benefited historically from the more improved economic growth," she said. "commodities deserve their rightful place in a portfolio. They are one piece of a well-diversified portfolio," she said.
Although Simonetti remains positive on gold, she added that the precious metal still faces significant risks from potentially higher interest rates. The Federal Reserve has noted on several occasions that rising inflation this year is expected to be transitory. The central bank has also said that it doesn't expect to raise interest rates until the U.S. economy is well on its way to a full recovery and inflation has stabilized at 2%, rising moderately above its target.
However, Simonetti said that what happens if inflation proves to be a lot more solid than the central bank expects.
"The Federal Reserve is absolutely watching inflation, and they will have to act if it rises too high," she said. "It is very difficult to put any timeline on it. But we do believe that a rate hike is on the horizon."
In this current environment with so many unknown factors impacting investment strategies, Simonetti said that now is time for investors to be actively involved in their investment strategies and to stay disciplined.
"We believe that this is a stock picker's market," she said. "This is not the time to just put the portfolio together with just broad market indexes. There are a lot of risks, but there are also a lot of opportunities out there. If we can add to the investment portfolio risk hedges like commodities, this will be a perfect time to do it."