War in Lebanon highlights defensive investments

If you want to keep your wealth and not see it eroded by poorly performing financial markets and inflation then there are but a few logical options: US bonds, precious metals and probably the US dollar.

A contrarian might argue that with bombs falling on Lebanon and oil prices at a record time this is the very moment to pick up assets cheaply. Yet apart from Lebanese bankers this argument is not being widely touted even by die-hard contrarians.

The obvious reason is that they believe, and so does an increasing number of investment professionals, that the investment environment is going to get worse - and possibly a lot worse - before it gets better.

Asset price correction

Global equities are still priced to reflect a booming world economy and not a likely downturn and more modest stock ratings. Real estate is still priced to reflect low interest rates which have now gone. So what happens if the present conflagration in Lebanon shifts to the wider Middle East?

Who can tell what will happen? Certainly a war in Lebanon looked most unlikely just a few weeks ago. So what is the next nasty surprise? Maybe nothing. But who in their right mind would gamble money on it?

Hence defensive investments are back. Gold rallied strongly on the war in Lebanon but has slipped to $620 an ounce, and would power far higher in an oil price spike.

Safe havens

The US dollar has also moved to a three-month high reminding investors that the US dollar is a 'safe haven' currency in a crisis. Indeed, if stocks and real estate sold off worldwide then the US dollar would rally as this is simply a move from hard assets into cash which boosts demand for the greenback and hence its value.

It is almost the same story for US bonds although here the reason for 'safe haven' status is that bond prices would benefit if the Federal Reserve was forced into emergency interest rate cuts to support capital markets. This has always been the pattern in the past, and given the likelihood of a dollar rally too, not a bad short term investment strategy.

Indeed, investment options in this environment come from two sources: protection against a possible crash in equities and real estate; and investments that can profit from a further spike in the oil price such as precious metals, or anything associated with oil. Oil companies still trade on very reasonable ratings and could prove an excellent short-term investment.