In stints when economic data and yields portray the possibility of a broad economic recovery, it may seem odd to intensify thinking on how to protect investment portfolios against a severe downturn.

However, when taking into consideration that markets are currently being fuelled by monetary easing, the possibility of a US-China “phase one” deal, and signs that the UK will be able to avert tumbling out of the EU without a deal, concerns on the veracity of the current economic turnaround may once again resurface.

This, due to the likelihood that the latter were imperative in supporting markets to-date, which may however still be surrounded with several uncertainties and might further push markets to crumble.

Historically, in periods of economic uncertainty, investment grade bonds – traditionally a crisis-offsetting asset class, have been the haven of choice for investors. 

Given that investment grade bonds are currently expensive, and yields are revolving at significantly low levels, their usefulness as a protectionist measure against economic downturn has deteriorated. 

Due to the latter, and the worsening economic conditions in 2019 – looking certain to post the worst global economic performance for a decade, investors have shifted to precious metals in order to diversify their portfolios, and thus safeguard their invested capital. 

The four industry-standard precious metals, used for both investing and hedging include gold, silver, platinum, and palladium. 

Ensuing the recent economic downturn and industrial requirements, the demand for the four industry-standard precious metals have significantly increased over the past year, this being reflected in the noteworthy increase in prices. 

What is more interesting is that, over the past year, the significant demand for palladium, mainly driven by the automotive sector lead to an acute supply shortage, making Palladium the most valuable of the four. 

The growing value of palladium is mainly attributed to an increase in demand as a result of most car manufacturers, shunning the use of platinum and preferring to use palladium, in vehicle catalytic converters, designed to reduce harmful emissions for engines running on petroleum.

In a bid to reduce the said harmful emissions, governments, especially China’s, tightened its regulations vis-à-vis the emissions released, forcing automakers to further increase demand, resulting in a global shortage, instigating palladium prices to hit successive records.

As demand for the said metal is currently buoyant, and economic data remains mixed, it may indeed be a good idea to protect one’s investment portfolio against a severe economic downturn, this by exposing oneself to precious metals.

A name that undoubtedly crops up in the high yield space is Norilsk Nickel PJSC; the world's largest producer of palladium, which over the past few years reaped the benefits of increasing their palladium production. 

Given that palladium prices are expected to remain on the high side, yet trade lower compared to the 2019 peaks, Norilsk Nickel PJSC may yet continue to affirm its success story. 

As conferred, given the rather gloomy economic scenario, looking for pockets of opportunities, aligned to more risk-averse assets may indeed be a good option. That said, we reiterate that being very selective is imperative at this juncture.

Disclaimer: This article was issued by Christopher Cutajar, credit analyst at Calamatta Cuschieri. For more information visit https://cc.com.mt/. The information, view and opinions provided in this article are being provided solely for educational and informational purposes and should not be construed as investment advice, advice concerning particular investments or investment decisions, or tax or legal advice.

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