3 charts show the best investments to make going into aggressive Fed rate hikes, Russia’s war, and a worldwide energy shock

• Fed rate hikes, Russia’s war, and soaring energy prices have upended equities, crypto and bonds this year.
• Macro Hive’s Bilal Hafeez shared how investors should position themselves for this period.
• Cash and commodities might be the best investments, he says.

The Fed’s era of ultra-easy monetary policy has begun to unwind, and investors are debating how best to position for a series of rate hikes this year and next.

The US central bank raised its benchmark interest rate by 0.25 percentage points last week, and chairman Jerome Powell has signaled more aggressive increases are on the way. If the Fed raises rates at every meeting this year, including an expected 50 basis point hike at both its May and June meetings, that would translate into two full percentage points of increases in 2022.

On top of that, markets are grappling with the fallout from Russia’s invasion of Ukraine and the stark reality of shockingly high energy prices, which are often associated with global recessions.

Bilal Hafeez, Macro Hive’s head of research, told us how investors should arrange their portfolios, so a big down-day won’t significantly reduce the value of their overall investments.

Hafeez is a former global head of strategy at Nomura, and a former head of multi-asset research and advisor to the CEO at Deutsche Bank. 

He broke down what Macro Hive’s investment preferences are when the Fed is raising rates:

• Underweight bonds and equities, and overweight cash and commodities.
• Modestly long crypto (adjusted for volatility, it has underperformed less than equities)
• In US equities, overweight homebuilders, large cap value, reopening trades, semi-conductors and financials (in the medium-term), underweight large cap growth and retail.
• In European equities, overweight financials.
  

  

Allocations to cryptocurrency should be made strategically, he believes.

“Recognizing that crypto has much larger swings than equities suggests your crypto positions should be smaller than your equity exposure,” Hafeez said.

“But more important than sizing is to recognize when the market is in a fragile state, with a much higher probability of large losses. That time is now.”

Markets have taken note of geopolitical tension and the energy price shock, Hafeez said, pointing to equities being down 6% this year, crypto down between 8% to 16%, and bonds down 5% to 10%. Only commodities are up this year – by a whopping 39%.

He noted these asset classes experience different price swings, so returns can be adjusted on the basis of volatility.

For Hafeez, cash and commodities might be the best investments right now.

“Therefore, for all the talk that, due to low yields, cash is a wasted investment and will not outperform inflation, it also will not lose you nominal value,” he said.

“It is better to be flat than to lose 5-18% on bonds, equities and crypto. This also suggests that in inflationary environments, cash, along with commodities, may end up being the best investment as cash limits your losses and allows you to survive.”

This recommendation is vastly different from hedge fund investor Ray Dalio, who called cash the “worst investment” as recently as December.

The chart below shows bonds have been the weakest performers in the current market cycle, followed by equities, then crypto.

Read More: Barclays shares why Fed hawkishness will put an end to the long-term stock market rally — and lists 7 investing sectors that will still perform in the low-return environment