Consider hedging positions in commodity-backed ETFs – GCB Capital report

Investors seeking to preserve the value of their funds amid weaker confidence, eroded reserves and elevated cedi vulnerabilities should consider taking positions in commodity-backed exchange-traded funds (ETFs) as a hedging strategy, research arm of GCB Capital, has said in its quarterly strategy outlook for 2023.

The report recommends that investors consider gold-backed ETFs listed on the Ghana Stock Exchange (GSE) as a safer currency hedge, despite the usual flight by investors to hard currency, particularly the US greenback, as a source of capital safety. Heightened inflation is expected to diminish potential real returns.

One gold-backed ETF that has started the year positively is New Gold, listed on the GSE. The ETF, which tracks gold prices, has seen its share price risen by 8.9 percent year-to-date, from GH¢217.80 at the beginning of the year to GH¢244.60 as of Friday, March 17, 2023.

In 2022, the ETF appreciated by 100.6 percent, from a year low of GH¢108.6 to GH¢217.80 at the end of the last trading session of 2022. The performance of the ETF’s underlying security, gold, has been the primary driver behind the appreciation. Despite retreating from a peak of US$2,057 per ounce in March 2022 to US$1,986.70 per ounce currently, the precious yellow metal remains a safe bet.

GCB Capital recommends commodity-backed ETFs as a hedging strategy to preserve value amid hard currency trades, which offer value but could result in inflationary depreciation pass-through and erode real returns in the short-term.

“…hard currency trades offer value. However, the resultant inflationary pressure from depreciation pass-through could erode the real returns on currency trades in the near term. Thus, we recommend commodity-backed ETFs as a hedging strategy to preserve value,” GCB Capital said.

This notwithstanding, it carefully recommended selective risk-taking for investors with high appetite for hard currency. “We recommend selective risk-taking in hard currency exposures in these sovereigns with relative resilience to shocks, robust external balances and credible policy environment as a strategy for diversifying the bond portfolio with new money”.

GCB Capital forecasts that equity valuations will remain depressed through 2023, and that the bourse will post a negative return for the second consecutive year. Low valuations present opportunities for selective risk-taking on ICT, energy, mining and distribution stocks to return value in the medium-term.

The macroeconomic environment has negatively impacted the earnings potential of listed firms on the Ghana Stock Exchange, with the composite index posting a negative return in 2022 and thus far in 2023.

“We expect the prevailing macroeconomic backdrop to undermine profitability from the fast-moving consumer goods and banking sectors post-DDEP as interest income is eroded,” it stated.

Alternative assets

Amidst the limited investment alternatives, GCB Capital indicated that investors could consider real estate investments and exposure to agriculture and energy-focused private equity (PE) funds as alternative investments, as well as commodities such as gold and other precious metals, infrastructure, and cryptocurrencies.

Nonetheless, it expressed the view that effectively harnessing these opportunities will require changes to the existing investment guidelines from the Securities and Exchange Commission (SEC) and the National Pensions Regulation Authority.

The changes to the existing investment guidelines will be to increase the investment ceilings on other asset classes as the current ceiling assigns heavyweights to the sovereign debt.