6% allocation to gold: How Société Générale is positioning its portfolio for a potential recession
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(Kitco News) - Gold continues to play an essential role in a diversified portfolio, with Société Générale saying it is maintaining a 6% allocation to the precious metal in its latest multi-asset Portfolio strategy.
After having their faith tested through December and January, the French bank said it is holding to its risk-off defensive positioning. The analysts noted growing recession threats and said the destination is more important than the journey or short-term market volatility.
The analysts said they see the U.S. falling into a recession by early 2024.
"With the first clear signs of cracks (systemic risk) and a U.S. recession now part of the 12-month investment horizon, we certainly do not wish to raise our risk profile at this juncture," the analysts said in the report.
Looking at how SocGen is preparing for an economic slowdown, the most significant shift in its portfolio is a 10% allocation to cash, up from no allocation in December. Digging deeper into its cash holdings, the bank said that diversification will be critical. The bank’s biggest currency position is in euros, presenting 43% of its holdings; at the same time, its dollar exposure represents about 29%. The bank holds 9% of its cash in Japanese yen and 2% in Chinese yuan and finally, emerging market currencies represent about 17% of its cash position.
"Cash is becoming a compelling alternative to fixed income amid uncertainty around duration and default risk," the analysts said. "We suspect USD strength has peaked and that the equilibrium will be increasingly in favor of the euro due to a time lag between the Fed and the ECB rate-hiking cycle, with the former peaking much earlier than the latter."
At the same time, SocGen said that the global dedollarization trend continues to gain momentum. They said they expect central banks to continue to buy gold to diversify their holdings, even if the pace slows from the last year's record.
"The longer the Russia-Ukraine conflict endures, the faster countries not aligned with the west will be willing to isolate themselves from the USD. This will encourage central banks to continue their strong gold purchases. This is a long-term bullish driver for gold that is already supporting prices," the analysts said.
The analysts added that gold should also continue to benefit from lower bond yields as they expect the Federal Reserve to cut interest rates by the end of the year or early 2024.
Gold has seen a resurgence of safe-haven demand in the last two weeks as a global banking crisis has roiled financial markets. Monday, gold prices briefly pushed to a 12-month high above $2,000 an ounce.
In a separate report, commodity analysts at SocGen see gold prices retesting 2020 highs an ounce later this year, even if prices see a correction in the near term.
"Gold is expected to head gradually towards the upper part of its range since 2020 at $2,055/$2,075. This is a key resistance zone; overcoming it could mean the onset of a larger uptrend," the analysts said in the report.
SocGen continues to hold 6% of its portfolio in gold. At the same time, it has increased its broad commodity exposure by 5%, representing 11% of total exposure.
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The analysts said that a generally weak U.S. dollar should continue to support the broader commodity index. The analysts also noted that the worldwide green energy transition will drive long-term commodity prices.
"Greenflation is the inflation created when prices rise due to increased demand for (or reduced supply of) critical commodities that are needed to make the world sustainable and greener," the analysts said. "More than 20 different metals are critical for the clean energy transition, and cumulative demand for copper and nickel will have to more than double and quadruple, respectively, over the next 30 years to achieve the Paris Agreement…"
In broader financial markets, SocGen is slightly increasing its exposure in equities, raising it to 35% of its portfolio, up from 33% in December. In line with its weak U.S. dollar outlook, the bank has increased its exposure to European equities and lowered its exposure to U.S. stocks. Specifically, the bank recommends investors stay away from U.S. banks as the sector sees its worst crisis since the 2008 Great Financial Crisis.
"For equity investors, the most important thing to remember is that US stocks do not bottom until a recession has started and that the Fed rate cutting cycle is needed to see a restart of the secular bull market. We think that both a US recession and a rate-cut cycle will start next year," the analysts said.
SocGen has is also implementing a broad-based decline in bond exposure. The bank is looking to hold 29% of its portfolio in government bonds and 15% in corporate bonds, down from 33% and 25%, respectively.
"When we look at the fixed-income assets, we note that the volatility is very high. There is a lot of uncertainty on whether current government bond yields are sufficient for the duration risk. There is also a great deal of uncertainty around the trajectory of the global economy and hence whether the current yields offered by corporate bonds are high enough to be attractive. On the other hand, cash (overnight deposit rates) is free from duration risk and default risk," the analysts said.