Matthew Feargrieve

Rising Bond Yields and their Impact on your Portfolio

Investment management consultant MATTHEW FEARGRIEVE explains the impact the current rise in government bond yields will have on the equities and bonds in your investment portfolio.

At its meeting on 17 March, the Federal Open Market Committee (FOMC) confirmed that interest rates in the US would remain at zero. There was no surprise here; it was widely anticipated that the Fed would remain committed to its policy of supporting the US economy until it is back on its feet. As if to underscore this, the Fed indicated that it isn’t expecting a rate increase until 2023 at the earliest, and reiterated that the bar for raising the rate will remain high.

Whilst intimating that its inflation expectations remain anchored, the Fed nonetheless scaled up its inflation forecast for 2021, which it now sees as running to 2.4%, ahead of its previous estimate of 1.8%.

The Fed also remained committed to the pace it has set for bond buying. It will continue purchasing at least US$120 billion of US Treasury bonds and mortgage-backed securities each month. The yield on the 10-year Treasury note fell on this news.

So: low interest rates, rising inflation forecasts and government bond repurchases, on top of huge, post-pandemic government spending programmes: this is the (entirely natural) backdrop to the recent inexorable rise in yields on government bonds.

Why are yields on government bonds rising?

Yields on government-issued debt instruments are rising because of two things inflation and fiscal stimulus. These two dynamics normally cause price inflation.

Inflation is bad for government bonds. When prices rise at a rate greater than the interest earned on a bond, it follows that the value of the fixed income delivered by the bond will fall. Consider a five-year bond paying 2% nominal interest. If inflation rises to 2.5% for those five years, the income paid by the bond will not be able to keep up.

Fiscal stimulus is also bad for government bonds. When governments pump out debt, the price of bonds falls, whereas the yield, being inversely related to bond prices, rises. A related market phenomenon is the recent emergence of bond vigilantes, bond investors who discourage fiscal stimulus by selling bonds in large amounts, thereby increasing bond yields. This in turn makes borrowing more expensive for governments, which acts as a potential disincentive on issuing more debt, which is the desired goal of the vigilantes.

Rising yields in turn depress bond prices, making investment in bonds and government debt less attractive. The combined market forces of inflation and rising yields have caused the market value of bonds to fall, as have the activities of the bond vigilantes.

The rising yields will stick around for as long as inflation is a worry. And an inflationary economic environment favours certain kinds of asset classes.

What do rising bond yields mean for my portfolio?

When thinking about rising bond yields and the prospect of inflation, it is necessary as usual to consider separately the “bonds” (debt) and the “equities” (stocks and shares) components of your portfolio.

Bonds

Given the uncertainties in the bond markets, you would be forgiven for thinking about moving some of your bond and fixed-income investments into cash, whilst waiting to see where longer-term bond rates end up.

Whilst uncertainties in the bond (and equity) markets might argue in favour of increasing your cash reserve to between 10% to 17% of the overall value of your portfolio, you can are by no means precluded from buying bond funds for your portfolio. Just make sure that you follow these two, protective rules.

First, avoid bonds with longer maturities, say, anything over three to five years. Bonds with longer maturities are more exposed to changes in interest rates, meaning they have more to lose if rates rise (which they invariably do, once inflation kicks in).

Secondly: use inflation-linked bonds (like TIPS) as a way of keeping your money in fixed income whilst protecting against inflation risks. The coupon offered on these bonds is linked to a rate of inflation, meaning the interest they pay rises as inflation goes up.

What follows are some low cost, exchange traded funds (ETFs) and mutual funds that provide (a) index-linked exposure to government debt and (b) equities in the asset classes just discussed, both in return for an acceptably-low annual charge.

Please remember, these are ideas only, not recommendations or formal investment advice.

Bond Funds

The iShares USD TIPS 0-5 UCITS ETF (GBP Hedged) combines both protections, by investing in index-linked US Treasury Bonds with short maturities (0-5 years). With a respectable performance history, a low buy price (around £5 per unit at time of writing) and an annual charge of 0.12%, this product allows you to include bonds in your portfolio and hedge against possible losses due to inflation.

A suitable bedfellow for this fund could be the Lyxor Core UK Government Inflation Linked Bond UCITS ETF, providing access to UK government bonds with in-built protection against inflation, for an OCF of just 0.07% (upside) and a rather high per-unit buy price of around £20 (downside).

Finally, a fund providing access to global government bonds with index-linked protection against inflationary pressure: the iShares Global Inflation Linked Government Bond UCITS ETF, a fund with a Morningstar rating of Four Stars, and an OCF of just 0.20%.

Equities

Market fears about inflation are already being played out on the US Nasdaq index, which is dominated by high growth tech stocks. The index has fallen by more than 8% in the past two weeks.

Inflation, though, is not necessarily a bad thing for all stocks. Indeed, it has different implications for different types equities. A big consequence of inflation (or the fear thereof) is to drive in the realm of investor sentiment a rotation out of (high-value) growth stocks into (cheaper and more cyclical) value stocks.

Growth stocks were the big winners of 2020: the tech, pharma and stay-at-home retail stocks, which did so well partly because of the low rate, low inflation environment. An inflationary environment threatens that appeal.

And so US mutual funds focused on value stocks enjoyed inflows of US$6.3bn in February, up from US$1.3bn in January. Growth funds, in contrast, saw outflows of US$18bn in January.

Correspondingly, the MSCI global value index has risen nearly 9% so far this year. In 2020r it fell by 3.6%, lagging the MSCI global growth index by 33% as money poured into stocks like Tesla, Peloton and Apple. So far in 2021, in contrast, it is the likes of ExxonMobil, Caterpillar and Wells Fargo that are doing better.

Gold, property, commodities, infrastructure and smaller companies are sectors that are set to do better than they did over the pandemic. The kinds of stocks which have benefited so much from the a low-rate, low-inflation environment that we have had for some time – the prime example being Big Tech- are now expected to perform less well than they did in 2020.

Sectors like materials, commodities, consumer goods and industrials are all expected to start to do better as global economies start to pick up speed.

Commodities historically outperform when inflation kicks in. Their relationship is not clear cut though. Rising commodity prices tend to be both a cause and a reflection of inflation. Commodity producers often raise their prices in line with inflation because their cost of production goes up, in turn exacerbating those rises.

Separately, asset classes like property and infrastructure often do well in times of inflation. Infrastructure assets have explicit linkage to inflation, and the relationship of infrastructure to property is instructive: as prices rise, so do building costs, and therefore, so do property prices.

Lastly, many investors will have their eye on gold. Many of us will have bought some exposure to gold miners and gold producers for our portfolios at the start of the pandemic, given that gold is the traditional flight-to-safety asset when equity markets are turbulent. When inflation is driven by rising commodity prices, gold tends to do well.

Equity Funds

Commodities

The Lazard Commodities fund tracks the Bloomberg Commodity Total Return Index, with most of its exposure to blue chip gold, gas and agricultural producers and processers in the US and the UK. The fund is structured as a Dublin OEIC and this entails higher fees: an annual charge of 0.50% together with a per-transaction cost of 0.48%, which will be a turn-off for some investors.

Infrastructure & Property

The Legg Mason Clearbridge Global Infrastructure Income fund is rated with Five Stars by Morningstar but we feel its five-year performance doesn’t justify its 0.92 annual charge plus whopping 0.62 per-transaction cost.

A cheaper alternative to give your portfolio indirect exposure to international property, and with respectable five year performance, is BlackRock’s iShares Global Property Securities Equity Index Fund, rated with three Stars by Morningstar and priced at an attractive 0.18% per year with an additional 0.08% per-transaction fee. The fund is an ETF that tracks the FTSE EPRA Nareit Custom Developed Index, which provides you with proxy access to global property companies, just over the majority of which are in the US, with the remainder being fairly evenly split across Canada, Europe (including the UK), MENA, Asia Pacific (including Japan) and Australia.

Gold

We explored the fortunes of gold prices over 2020, and their unlikely “safe haven” pairing with Bitcoin in our earlier blog here.

Ninety One Global Gold 1 Acc is a globally invested OEIC owning shares of companies involved in gold mining and in related derivatives, is another holding, and is up 37% over 12 months.

A well-performing catch-all for gold and precious metals with Golden Prospect Precious Metals, which has an underlying investment split of 66% gold, and 25% silver, where producers are 64% and developers 24%.

A higher-costing but still decent alternative with reasonable performance is the WisdomTree Physical Gold ETF, which has an annual charge of 0.39%.

Emerging Markets

Opinion is divided on the attractiveness of emerging markets. A more positive view is that emerging market economies are a good indirect bet as they benefit from the positive pulse of increased spending by the US consumer.

A regional, emerging market fund with a nice infusion of sustainability is the Stewart Investors Asia Pacific Leaders Sustainability Fund, which allocates the majority positions in the Emerging Asia sector.

An alternative providing broad indirect access to emerging markets is the Artemis Global Emerging Markets fund. Like the Stewart fund, this has the majority of its exposure to the Emerging Asia zone, but has additionally positions in Africa, Latin America and Emerging Europe.

Blended funds

The convenience of having a one-stop-shop fund like this comes at a price however: a relatively stiff OCF of 0.86% per annum, but still not bad for coming in at under 1.00% per year.

What else?

To learn more about bonds and bond yields, click here.

To find out more about mutual funds and ETFs that could protect your portfolio from inflation, click here

For some Ideas for your ISA in a post-pandemic recovery phase (reflationary or inflationary) click here for our earlier blog on how to make the most of your 2020/21 tax allowances before the end of the tax year on 5 April.

For our 2021 Investment Outlook across all the major asset classes, click here.

MATTHEW FEARGRIEVE is an investment management consultant. You can read his investing blog here and see his Twitter feed here.

Matthew Feargrieve, investment management consultant

IMPORTANT: the views expressed in this article are opinion only, and are not intended to be relied upon as financial advice or treated as a personal recommendation for any particular investment. If you are unsure about the suitability of an investment you should speak to an authorised financial adviser.

The Fed’s Interest Rate Decision: Inflation-proof your Portfolio now

As we contemplate the Fed’s interest rate decision, and bond yields continue to rise, investment management consultant MATTHEW FEARGRIEVE considers some low-cost mutual funds and ETFs to add some inflation-proof padding to your portfolio.

As we write, the Federal Open Market Committee (FOMC) is holding its March 16-17 policy meeting. The Fed’s main objective will be to convince consumers and financial markets that a post-pandemic economic recovery is not guaranteed, and that interest rates in the US are unlikely to be raised off the floor, which is where they have been since the start of the pandemic. Indeed, the Fed’s median rate forecast indicates that it isn’t expecting a rate increase until 2023 at the earliest.

What is less clear, however, is whether the Fed might upgrade their inflation forecasts.

Inflation and why it matters

The rate of inflation in the US is still well sort of the Fed’s indicated rate of 2%. But there is a real and growing concern that global stimulus packages, coupled with the pent-up demand from locked-down consumers, could hike up the cost of living significantly, which will precipitate a period of price inflation.

So what should I do with my Portfolio?

In the first part of this blog, we discussed the impact that an inflationary economic environment, together with rising bond yields, will have on your personal investment portfolio. (Click here for an explanation of rising bond yields and their impact on your investments).

Now we give you some mutual funds and ETFs you might consider for inclusion in your portfolio, as a means of providing some protection against inflation (if it comes).

Bonds

What follows are some low cost, exchange traded funds (ETFs) that provide index-linked exposure to government debt in return for an acceptably-low annual charge. Please note that these ETFs are ideas only, not recommendations or formal investment advice.

The iShares USD TIPS 0-5 UCITS ETF (GBP Hedged) combines both protections, by investing in index-linked US Treasury Bonds with short maturities (0-5 years). With a respectable performance history, a low buy price (around £5 per unit at time of writing) and an annual charge of 0.12%, this product allows you to include bonds in your portfolio and hedge against possible losses due to inflation.

A suitable bedfellow for this fund could be the Lyxor Core UK Government Inflation Linked Bond UCITS ETF, providing access to UK government bonds with in-built protection against inflation, for an OCF of just 0.07% (upside) and a rather high per-unit buy price of around £20 (downside).

Finally, a fund providing access to global government bonds with index-linked protection against inflationary pressure: the iShares Global Inflation Linked Government Bond UCITS ETF,a fund with a Morningstar rating of Four Stars, and an OCF of just 0.20%.

Equities

Inflation is not necessarily a bad thing for all stocks. Indeed, it has different implications for different types equities. A big consequence of inflation (or the fear thereof) is to drive in the realm of investor sentiment a rotation out of (high-value) growth stocks into (cheaper and more cyclical) value stocks.

Your equity fund choices for your portfolio should reflect this rotation. This shift favours real assets such as commodities, infrastructure and gold, all of which are expected to do well in the reflationary phase that is accompanying the global vaccine roll-out.

You medium-term objective will be to have a balanced, diversified portfolio of quality liquid assets with a bias towards equities, which is were the growth will be found, as opposed to bonds. So the traditional 60/40 equity/bond split will need to be kept under active review, and fearlessly challenged when the capital growth of your portfolio requires.

To this end, we like funds such as the BlackRock Gold and General fund, the Lazard Commodities fund, and the Legg Mason Clearbridge Global Infrastructure Income fund.

For investors cautious about the prospects for recovery and for rising inflation, and wanting the convenience of a blended fund, the AJ Bell Personal Assets Trust offers a suitably cautious approach with some inbuilt inflation-proofing with a 12% exposure to gold and a further 35% in index-linked bonds, based on a core 40% exposure to high-quality equities such as Microsoft, Diageo and Unilever. The convenience of having a one-stop-shop fund like this comes at a price however: a relatively stiff OCF of 0.86%, but still not bad for coming in at under 1.00% per annum.

Going forward

Remember, inflation isn’t with us just yet, and market views as to when, or if, it will come remain mixed. But with a few easy, low-cost adjustments, you can provide your portfolio with some insurance against rising asset prices.

MATTHEW FEARGRIEVE is an investment management consultant. You can read his investing blog here and see his Twitter feed here.

IMPORTANT: this article contains the author’s opinions only, and is not intended to be binding investment advice for which you should always consult your own professional financial adviser.

What’s the Story with the Bond Markets?

Investment management consultant MATTHEW FEARGRIEVE explains why the bond markets and inflation are in the news this week, and what this means for your investment portfolio.

Rising yields on government bonds are a problem right now in the US and, therefore, around the world. All eyes this week will be on the inflation rate-setting meetings of the Federal Reserve, the Bank of England and the Bank of Japan.

Government-issued bonds are a barometer of inflation. Bonds are the financial asset most sensitive to inflation. This is because the present-day value of the future interest and capital repayments of government bonds are directly influenced by inflation. Reduced returns make bonds less attractive to investors. Hence the trouble and strife in the bond markets of late.

In this blog we briefly look at what a bond yield is. Then we explain why bond yields are rising at the moment, and why we think they will continue to do so. Lastly we discuss the impact that rising bond yields will have on your personal investment portfolio, or pension plan.

What are bond yields?

A government bond is basically an IOU, or debt instrument, issued by a government or a country’s central bank (like the Fed in the US and the European Central Bank or ECB in Europe) in return for money. The bond instrument pays the lender (also known as the bond investor or bondholder) a fixed return over a fixed period. So 10-year US Treasuries are bonds that are repayable by the US government over a ten-year period.

The bond yield is essentially the return that a bond delivers.

Why are bond yields rising?

Bond yields are rising because of two things that are currently on the mind of financial markets: inflation and fiscal stimulus.

The recently approved US$1.9 trillion stimulus package approved in the US, and similar boosts provided by the ECB in Europe (which has promised to accelerate its €1.9 trillion bond-buying programme over the next few months), are big pieces of fiscal stimulus, which are combining with the unleashing of pent-up consumer demand on the part of hundreds of millions of consumers who have saved money over a year of lockdown. These two dynamics – government economic initiatives and consumer spending – normally cause price inflation.

Inflation is bad for government bonds. When prices rise at a rate greater than the interest earned on a bond, it follows that the value of the fixed income delivered by the bond will fall. Consider a five-year bond paying 2% nominal interest. If inflation rises to 2.5% for those five years, the income paid by the bond will not be able to keep up.

In this situation, bond investors want some reassurance that the long-term returns on their bonds will not be eroded by inflation over the term (or maturity) of the bond.

Government-led fiscal stimulus is, somewhat paradoxically, also bad for government bonds. When governments pump out debt, the price of bonds falls, whereas the yield, being inversely related to bond prices, rises. A related market phenomenon here is the emergence of bond vigilantes, bond investors who want to discourage monetary or fiscal policies by selling bonds in large amounts, thereby increasing bond yields. This in turn makes borrowing more expensive for governments, which acts as a potential disincentive on issuing more debt, the desired goal of the bond vigilantes.

Government and corporate bonds outside the US will broadly align with the US market, which is the biggest bond market in the world. Accordingly, there has been some rise in bond yields in Japan, Europe and the UK, even though these economies have not implemented fiscal stimulus programmes anything like the scale of Biden’s US$1.9 trillion package.

Are rising bond yields a bad thing?

The rising yields will stick around for as long as inflation is a worry. And an inflationary economic environment favours certain kinds of asset classes.

What are the implications for my Portfolio?

Let’s look at the “bonds” (debt) and the “equities” (stocks and shares) parts of your portfolio separately.

Bonds

Given the uncertainties in the bond markets, many investors will prefer to move some of their debt investments into cash, whilst we wait to see where longer-term bond rates end up.

You can still buy bond funds for your portfolio, though; just make sure that you follow two protective rules.

Equities

We are seeing the effects of inflation expectations on the US Nasdaq index, which is dominated by high growth tech stocks, has fallen by more than 8% in the past two weeks.

Inflation has different implications for different equities (stocks and shares), the main one being a rotation out of high-value ‘growth’ stocks and into ‘value’ stocks.

And so US mutual funds focused on value stocks, which are cheaper and more cyclical than growth stocks, enjoyed inflows of US$6.3bn in February, up from US$1.3bn in January. Growth funds, in contrast, saw outflows of US$18bn in January.

Similarly, the MSCI global value index has risen nearly 9% so far this year. Last year it fell by 3.6%, lagging the global growth index which soared by 33% as investors flocked to stocks like Tesla, Peloton and Apple. This year the winners are the likes of ExxonMobil, Caterpillar and Wells Fargo. Being caught on the wrong side of this rotation has been painful but fantastic for those who kept the faith with value through the long growth dominance.

Gold, property, commodities, infrastructure and smaller companies are sectors that are set to do better than they did over the pandemic. The kinds of shares which have benefited so much from the a low-rate, low-inflation environment that we have ad for some time – the prime example being Big Tech- will continue to perform relatively less well than the stellar performance they put in over the course of 2020.

Sectors like materials, commodities, consumer goods and industrials are all expected to start to do better as global economies start to pick up speed.

Commodities have historically outperformed when inflation has picked up. Their relationship is not clear cut though. Rising commodity prices tend to be both a cause and a reflection of inflation. Commodity producers often raise their prices in line with inflation because their cost of production goes up, in turn exacerbating those rises.

Asset classes like property and infrastructure often do well in times of inflation. Its relationship to the former is clear: as prices rise, so do building costs, and therefore, so do property prices. Rental rates will also typically rise alongside interest rates.

Infrastructure is another potential beneficiary. Most infrastructure assets have explicit linkage to inflation, meaning they tend to keep up with rises.

Lastly, keep an eye on gold. Many of us will have bought some exposure to gold miners and gold producers for our portfolios at the start of the pandemic, given that gold is the traditional flight-to-safety asset when equity markets are turbulent. When inflation is driven by rising commodity prices, gold tends to do well.

MATTHEW FEARGRIEVE is an investment management consultant. You can read his investing blog here and see his Twitter feed here.

What’s Happening in the Bond Markets Right Now?

Investment management consultant MATTHEW FEARGRIEVE explains the activity that is taking place in the bond markets right now, the impact on bond prices and bond yields, and how you can protect your personal investment portfolio against these market movements.

Bonds have been a troublesome asset since the start of the year. Bond valuations (and, therefore, investment funds that hold bonds) are currently subject to two market dynamics that are negatively impacting government (and, to some extent, corporate) debt as an attractive investment option right now. We are talking about inflation and fiscal stimulus.

Inflation

First, inflation. Many commentators now agree that inflation is on the visible horizon. Conditions for an inflationary economic environment look right: fiscal and monetary stimulus packages are on their way, like President Biden’s whopping US$1.9 trillion package, and the European Central Bank (ECB) has similarly reiterated its commitment to providing monetary support to the Eurozone; furthermore, these government initiatives are combining with widespread pent-up demand on the part of hundreds of millions of consumers who have saved money over a year of lockdown. These are factors that normally usher in a period of price inflation.

Government bonds are a bit like a canary in a coalmine, detecting any hint of inflation in the air. Bonds are the asset with the most to lose from inflation. The present-day value of the future interest and capital repayments of government bonds are directly influenced by inflation.

When prices rise at a rate greater than the interest earned on a bond, it follows that the value of the fixed income delivered by the bond will fall in real terms. Consider a five-year bond paying 2% nominal interest. If inflation rises to 2.5% for those five years, the income paid by the bond won’t be able to keep up.

Fiscal Stimulus

The markets have been spooked recently by the strong rise in bond yields (the return on a bond), triggered by the roll-out of worldwide stimulus packages, particularly in the US and Europe.

When governments pump out debt, the price of bonds falls, whereas the yield (which is inversely related to price) rises. US and European governments have been spooked by the recent emergence of so-called bond vigilantes, bond investors who want to discourage monetary or fiscal policies by selling bonds in large amounts, thus increasing yields. This in turn makes borrowing more expensive for governments.

The 10-year US Treasury yield was around 0.9% in December 2020. Although this represents a dispiriting rate of return on a ten year investment, the low rate clearly signalled that the markets considered the risk of inflationary erosion on a ten-year debt to be minimal.

Fast-forward to the present (March 2021): the 10-year US Treasury yield has risen to a whopping 1.6%. This yield is about 2.3% higher than the yield on 10-year Treasury Inflation-Protected Securities, or “TIPS”, compared with a gap of just under 2.0% at the end of last year. This is significant, given that TIPS have some inflation-linked inbuilt protection. The difference demonstrates how investors are worried about the return of inflation; their response is to demand a higher yield today from conventional government bonds than from TIPS, because they believe that the risk of inflation has increased.

There has also been a modest rise in bond yields in Japan, the Eurozone and the UK, even though these economies are not announcing big new stimulus measures on top of previously-announced anti-pandemic spending. All bonds are priced by comparison, meaning that government and corporate bonds outside the US will broadly align with the US market, which is the biggest bond market in the world.

The effect of rising bond yields on bond prices

Rising yields in turn depress bond prices, making investment products in this asset class less attractive. These two market forces – looming inflation and rising yields – have caused the market value of bond funds to fall in recent weeks.

As you know, traditional investing wisdom dictates that you should hold higher proportions of bonds in your personal portfolio as you get closer to retirement, based on the premise that bonds are less risky than equities (stocks and shares) and pay a steady income.

That wisdom is being challenged right now, given the difficulties in the bond markets. Nevertheless, bonds can and should feature in the portfolios of most investors, and I will explain precisely how, when I come to suggest some bond funds for your personal investment portfolio (below).

What will happen next in the Bond Markets?

The short answer is, naturally, that no-one knows. No-one ever knows what will happen next, in any market. There are fears that a continuing rise in bond yields will trigger a repeat of the 2013 ‘Taper Tantrum’, when the US Federal Reserve’s decision to reduce its Treasury bond purchasing panicked investors and pushed yields higher. The situation was exacerbated by Ben Bernanke’s loose talk about curtailing the quantitative easing policy in place since the 2008 Financial Crisis.

The Fed though has signalled its willingness to control yields, although it is not surprising that US Federal Reserve chair Jay Powell is treading carefully in territory where Bernanke trod heavily. The Fed is still somewhat short of its inflationary target of 2%, as it has been for over a decade, and this is against a backdrop of central banks hoping inflation can reduce the debt burden they’ve incumbered throughout the covid lockdowns.

Bonds and your Portfolio

Bond investors can take some comfort that we have still some way to go before inflation gets anywhere near the 2% set by the Fed. So should you have bonds and bond funds in your portfolio?

Given the uncertainties in the bond markets, many investors will prefer to move some of their debt investments into cash, whilst we wait to see where longer-term bond rates end up.

You can still buy bond funds for your portfolio, though; just make sure that you follow two protective rules: first, avoid bonds with longer maturities, say, anything over three to five years. Bonds with longer maturities are more exposed to changes in interest rates, meaning they have more to lose if rates rise (which they invariably do, once inflation kicks in).

Second rule: use inflation-linked bonds (like TIPS) as a way of keeping your money in fixed income whilst protecting against inflation risks. The coupon offered on these bonds is linked to a rate of inflation, meaning the interest they pay rises as inflation goes up.

What follows are some low cost, exchange traded funds (ETFs) that provide index-linked exposure to government debt in return for an acceptably-low annual charge (which, as far as this commentator is concerned, is anything under 0.6 per cent per annum). Please note that these ETFs are ideas only, not recommendations or formal investment advice.

MATTHEW FEARGRIEVE is an investment management consultant. You can read his investing blog here and see his Twitter feed here.

How Blockchain Technology in the Meat Industry is Improving Animal Welfare

Investment management consultant MATTHEW FEARGRIEVE examines how the meat industry is applying blockchain technology to the handling and transportation of livestock in a way that is being welcomed by animal welfare groups and businesses alike.

We have been eating animals for thousands of years. Throughout the post-war era, industrialisation and higher disposable incomes in developed nations boosted meat consumption. In under than two decades, however, our increased awareness of environmental damage has thrown a spotlight on the industry which has made its main players squirm.

A report entitled “Livestock’s Long Shadow”, published in 2006 by the UN Food and Agriculture Organization, estimated that greenhouse gas emissions produced by the meat industry were potentially greater than that of the global transport sector, and at minimum were around 5 per cent of global emissions.

The notion that the meat industry is as damaging to the environment as the transport sector has inevitably led to comparisons between emissions from a burger and those from a flight, with meat companies being compared to the oil majors. The industry is feeling the pressure.

A 2019 report by another UN body, the Intergovernmental Panel on Climate Change, calculated that low and middle income countries contribute 70 per cent of emissions from ruminants like cows, and 53 per cent from other animals such as pigs and chickens, whilst developed countries account for almost one-third of global greenhouse gas emissions from cows and sheep.

As the effects of the earth’s warming temperatures become more extreme, climate change campaigners, investors and consumers are increasingly scrutinising the greenhouse gas emissions attributed to the US$1.4 trillion meat industry. Meat producers, who slaughter and process animals, are facing calls by consumers and investors for more transparency. With many governments now committing to net-zero emissions by 2050, and the US set to rejoin the Paris climate agreement, the debate is turning to risks caused by climate change with livestock rearing and processing assets becoming less viable as the earth warms up. The scrutiny of the industry’s impact on the planet is only going to increase.

Many of the world’s meat producers have been slow to respond. A recent survey of the 60 largest listed protein companies, including meat and fish groups, revealed that three quarters of the companies surveyed have not declared or put in place reduction targets set according to scientific guidelines for emissions.

This unresponsiveness is expected to change, however, as institutional investors become increasingly focused on sustainability. For them, the environmental issues associated the meat sector are a business risk that means lower internal valuations. Unsurprisingly, the larger meat producers are starting to take steps to address the environmental impact of their practices and their public image. Like Tyson Foods, the largest meat company in the US, which is committing to tougher targets on emission reductions, as well as adjusting its budgeting and capital planning processes to reflect the longer time horizon of sustainability investments.

Tyson, like a growing number of other meat producers, has realised that future-planning is the only way preserve their long-term enterprise value and remain investible.

Enter Blockchain Technology

The animal meat industry is not very efficient. It is a burden on the environment and is more segmented than other types of food systems. In short, it is an industry ripe for technological streamlining.

From more robots on the processing lines, to sensors and artificial intelligence in the animal rearing process, as well as feed additives to reduce emissions, technology is playing a bigger role in the industry. And blockchain is one such technology.

JBS is Brazil’s largest meat producer. It has not enjoyed particularly good press of late, with charges of Amazonian deforestation being levelled against it. Like its US counterpart Tyson Foods, it has taken pressure from the newspapers and from its institutional shareholders to galvanize the company into action.

Most recently, accusations of “cattle laundering” – where animals from illegally deforested land are brought to legitimate cattle ranches that supply meat companies – has prompted JBS to pledge to use blockchain technology to ensure traceability of its cattle and meat.

Bad publicity aside, blockchain technology has huge potential to transform the different processes within the meat industry. There is a growing awareness in the industry that blockchain technology can equip industry players with the ability to provide market regulators, as well as consumers, with enhanced levels of transparency and assurance in food quality and safety.

Several applications have emerged:

boosting consumer confidence regarding the provenance of their meat, using tracking technologies.
tackling food fraud and enhancing product safety by reducing misrepresentation of red meat products in overseas export markets.
improving supply chain security and provenance by storing tracking information, thereby providing assurance that each participant along the supply chain did the right thing.
helping optimize supply chains by digitalizing and improving the export documentation processes.
providing greater levels of trust in supply chain data shared between participating parties.
enabling ‘smart contracts’, which are digitally encoded contracts that self-execute when programmed parameters are met.

As can be seen from the above, the application of blockchain technology in the meat industry has the potential to provide a boost for the integrity of the industry in two key areas, encrypted supply chains and provenance; both of which are central to consumer confidence in the end product.

The attraction for meat producers is obvious: a decentralized network based on cryptography that uses peer-to-peer consensus to validate transactions. In short, a system enabling international sales of meat to consumers who are increasingly demanding about the provenance and health of the animals whose meat they are eating, and the social impact of the product they are buying, by using encrypted time-stamped blocks and electronic records preventing after-the-point data manipulation.

A good example of blockchain’s multi-layered application in the meat industry is BeefChain, an electronic supply chain set up to enable Wyoming beef farmers to realise the full market premium for their beef by eliminating value leakage to intermediaries through system inefficiencies.

BeefChain was set up to meet two objectives. The first is to deliver technology to the participating farmers that enables traceability and proof of humane handling of livestock. RFID tags and other IoT devices upload information unique to each individual animal to the blockchain, establishing immutable, auditable provenance enabling farmers to capture premia associated with free range, grass fed livestock. Set up in 2019, BeefChain has tagged thousands of heads of cattle, which are hashed to the Ethereum blockchain.

The second objective is to create an end-to-end supply chain solution through partnerships with wholesale buyers, auction houses, feedlots and processing operations. These partnerships allow participating farmers to offer exclusive, long-term relationships with buyers across the globe.

In this way, blockchain technology boosts the value of the supply chain by delivering immutable, third party verification processes that benefit meat producers as well as other participants like distributors, retail grocers and, of course, the end consumer.

With the meat industry under increasing scrutiny from investors and consumers, and with certain parts of the industry facing increased competition to supply the growing market for premium meat in Asia and the Middle East, the increased take-up of blockchain technology across the whole industry can be expected to gather pace in the coming five years.

If you are interested in investment ideas to help give your personal portfolio some controlled exposure to blockchain and other automatic supply chain technologies, click here.

MATTHEW FEARGRIEVE is an investment management consultant. You can read his investing blog here and see his Twitter feed here.

The Dirty Truth about the Meat Industry

MATTHEW FEARGRIEVE looks at the global meat production industry and explains how its practices and its impact on the plant is being challenged by animal welfare and conservation groups.

As the effects of the earth’s warming temperatures become more pronounced, climate change campaigners and investors are responding to a growing demand for environmental improvements. As part of that they are broadening their approach from the damage caused by fossil fuels to other industries, especially the greenhouse gas emissions attributed to the meat and dairy industries. Amid growing pressure against the meat industry, some of Mrs Angus’ own peers have called for the need of a “social licence to operate”, another source of her anger.

Repudiating the slew of official sustainability reports critical of the meat and dairy industries, as apologies to “virtue signallers”, she argues that it is farmers who are best placed to understand the synergies between animals and land. Kangaroos, wallabies and emu roam her land, where eucalyptus and acacia trees grow. “Our climate has always changed. Responding to climate and weather are part of our day jobs.” But whether they like it or not, farmers such as Mrs Angus are facing growing demands for change. Meat producers, which play a key role in the $1.4tn global industry, buying from the farmers and slaughtering and processing animals, are also facing calls by consumers and investors for more transparency.

Humans have been eating animals for thousands of years. In the postwar era industrialisation and higher disposable incomes in developed nations boosted meat consumption. But in less than two decades the spectre of environmental damage has thrown a spotlight on the industry which its participants were ill-prepared for. The emissions case against the livestock industry took root after publication of a 2006 report by the UN Food and Agriculture Organization.

“Livestock’s Long Shadow” initially estimated that the GHG emissions produced by the industry were greater than that of the whole transport sector. But after criticism that the UN body had included both direct and indirect emissions for livestock compared with just the direct emissions data for transport, it settled on a figure of 5 per cent of global emissions, below transport’s contribution of 14 per cent. For livestock’s “lifecycle” emissions — the end-to-end process of growing the animal feed to bringing meat to the table — there is no direct transport comparison, FAO analysts said.

Nevertheless, the idea the industry is as damaging as the transport sector has led to comparisons between emissions from a burger and those from a flight, and meat companies to the oil majors. “Initially it was a big concern. Then as you understood what was going on, it became a big frustration,” says Stuart Roberts, a UK farmer who grows crops and raises livestock in the southern county of Kent. At issue is not just how the data is measured but also the source of livestock emissions, he adds.

Developed countries account for less than a third of global GHG emissions from cattle and sheep. According to a 2019 report by another UN body, the Intergovernmental Panel on Climate Change, low and middle income countries contribute 70 per cent of emissions from “ruminants” like cows, and 53 per cent from other animals such as pigs and chickens. The case against meat has continued with research published in the Eat-Lancet report, commissioned by the medical journal Lancet and non-governmental organisation Eat Forum, recommending a diet high in plant-based food and low on animal protein as a way to help the environment and human health, a view backed by the IPCC.

At a time when many governments are committing to net-zero emissions by 2050 and the US is set to rejoin the Paris climate agreement, the pressure is only going to increase, environmental experts say. “We’re not going to get rid of meat from our diets,” says Carole Ferguson from CDP, a non-profit group that tracks corporate climate disclosure. “But there has to be a certain acceptance that we have to cut back on the amount that consumers eat.”

Institutional investors are also taking notice. As with the oil and gas sector, the debate is turning to risks caused by climate change with livestock rearing and processing assets becoming less viable as the earth warms up. Teni Ekundare at the Fairr Initiative, an investor advisory and research network focused on sustainable protein production whose members manage $27tn worth of assets, says more investors are now concerned about the risks for food production linked to climate change. “Unless things are done, there is a risk that [the meat industry] becomes the next oil and gas with stranded assets,” she says.

Many of the world’s biggest meat companies have been slow to respond. According to Fairr’s annual survey of the 60 largest listed protein companies, including meat and fish groups, three out of four have not declared or put in place reduction targets set according to scientific guidelines for emissions. Indeed, in the year to November 2020, more than a third reported a rise in emissions. Now in its third year, the survey shows signs that a few of the large meat companies such as Canada’s Maple Leaf and Tyson Foods, the largest meat company in the US, are addressing climate risks. The number of companies committing to tougher “science-based” targets on emission reduction has increased from two a year ago, to seven, while a quarter are disclosing “scope 3” emissions that cover their supply chain, as well as direct ones.

For investors focused on sustainability, the risks around the meat sector mean lower internal valuations. “The sector’s valuation gets marked down due to meat as a source of environmental damage as well as being heavily impacted by climate change,” says Peter van der Werf, at asset manager Robeco. “Deforestation puts a discount on their fair value which we incorporate in our assessment.” Mr van der Werf says he has noticed a change in attitudes among companies, some of whom had initially denied any link between environmental issues and the industry’s performance. “They have faced outside pressure from consumers and they are having to create an answer for the negative impacts that meat has,” he says.

JBS, the world’s largest meat producer, is among the Brazilian companies under particular scrutiny over accusations about their links to the deforestation of the Amazon to make way for grazing and feed crops. As a result, some investors have placed meat alongside fossil fuels on their investment exclusion list. But companies have started to respond, says Mr van der Werf. “I think in general there is a realisation that [climate change] could be a real threat to the industry,” says Timothy Griffin, associate professor in nutrition, agriculture and sustainable food systems at Tufts University in the US. “That’s not the same as having a plan. But you can’t get to a plan unless people say this is real.”

‘Oil industry got it wrong’ : John R Tyson is an exemplar of the shift in the industry. The 30-year-old Harvard- and Stanford- educated, billionaire scion — who like Mrs Angus is a fourth-generation member of the meat industry — in 2019 became the sustainability officer for Tyson Foods. “The nature of sustainability investments is that they have a longer time horizon than the one to three, [or] five-year periods we might look at in our typical budgeting and capital planning processes,” he says. The company is a frontrunner in the meat sector for setting science-based environmental targets and working with NGOs on deforestation.

“This is how we run our business: thinking about the long term, decades in the future, because there’s a great balance to be struck between investing in ‘what is right’ and what is profitable today,” he adds. “And from an investor lens, preserving long-term enterprise value by setting ourselves up for the future.”

Robbie Miles, a fund manager overseeing sustainable food investments at Allianz, says: “The oil industry got it wrong, obfuscating the science,” and “not embracing change that needed to happen”. In the near term, the meat industry does not face an existential threat, but it will need to spend more money to become environmentally and socially sustainable, he adds. Meat companies, not known for their openness, also need to communicate their efforts “to avoid becoming pariahs”, he says.

“We’re clearly in the centre of public attention and Covid has accelerated that,” says Brian Sikes, chief risk officer at Cargill, the food commodities group and meat producer. “The more transparent we become, the more we tell our story, the more we let people in and do what we do.” Facial recognition for pigs In the town of Ness Ziona, 20 minutes drive from Tel Aviv, Ido Savir is waiting for Israel’s lockdown to end so he can serve his lab-grown chicken burgers at his eatery The Chicken. The former software engineer co-founded SuperMeat, a “cell-based” chicken start-up, five years ago, working with biological engineers to create meat from cells in bioreactors which look like brewing vats. “The animal meat industry is not very efficient. It’s a burden on the environment and is more segmented than other types of food systems,” says Mr Savir.

It is seven years since the world’s first lab-grown burger was introduced. Yet Singaporean food authorities in December became the first in the world to give regulatory approval to so-called “cultured” chicken. In Israel those trying SuperMeat’s vat-to-plate chicken will need to sign a waiver of any risks as the product has yet to receive regulatory approval from the country’s authorities. Cultured meat is the next iteration of the “alternative protein” sector, an arena where meat substitutes made from soyabean, pea and other plant proteins are forging the way. According to Fairr, the number of companies in its annual survey which have invested or have targets to grow alternative proteins has jumped more than fourfold since 2018 to 22. Cargill is among those investing in the sector, including cultured meat and a pea protein start-up, which supplies plant-based foodmakers. “We think about it as the centre of the plate . . . we think we should be able to provide [protein] to consumers, whether that’s plant-based, cell-based, insect-based or traditional animal agriculture-based,” says Mr Sikes.

From more robots on the processing lines, to sensors and artificial intelligence in the animal rearing process, as well as feed additives to reduce emissions, technology will play a bigger role in the meat industry in other ways too, say experts.

The supply chain, especially for industrial-scale livestock farming, will look different in the future, they say. In China, for example, some technology focused pig growers are using facial recognition to monitor each pig and its well being, while Brazil’s JBS has pledged to use blockchain technology to ensure traceability of its cattle and meat after facing accusations of “cattle laundering” — where animals from illegally deforested land are brought to legitimate cattle ranches that supply meat companies.

While technology is not the panacea to all the industry’s ills, it can help restore consumer confidence, says Peer Ederer, director of the Global Food and Agribusiness Network, a research and consulting organisation which advises food companies, including meat and alternative protein groups. Having an industrialised approach to animal rearing is not contradictory to having ecological and ethical operations, says Mr Ederer. Technology will be able to show consumers that “the animal has had a positive impact on the biosphere, [been] treated well, and slaughtered humanely in such a way that they didn’t suffer, and [was] processed right”, he adds. Farming the future Patrick Brown, founder and chief executive of plant-based meat start-up Impossible Foods, has said he wants to see animals eliminated from the food supply chain within 15 years. Other alternative protein entrepreneurs see a more diverse future. With the global population forecast to increase by a quarter to almost 10bn people by 2050, pushing up demand for protein, the world is going to need various sources, ranging from animals to cultured meat made in bioreactors to plant-based substitutes.

India’s New Covid Vaccine: Life Saver or Political Tool?

As India rolls out a home-made coronavirus vaccine to 300 million of its 1.4 billion people, and sells it to other countries, Matthew Feargrieve asks whether the drug is less a preserver of life and more a political tool to promote business in India.

IN AN EMOTIONAL address to the Indian nation, Narendra Modi has launched one of the world’s most ambitious Covid-19 vaccination programmes. Appearing at times to get carried away with his rhetoric of deliverance, the Prime Minister told the watching millions that “the nation has been desperately waiting for this moment”.

India, with its population of 1.4bn people and its recorded Covid infections running at some 11 million, has experienced some of the most draconian lockdowns which, so far, have had only limited efficacy in controlling the spread of the coronavirus across its villages, towns and cities. The pandemic has plunged India into recession and millions of Indians have been plunged further into worsening poverty as industries have faltered and jobs have been axed.

So Modi was naturally jubilant at the development, in record time, of the Covaxin vaccine that has been entirely developed and made in India, with the roll-out targeting 30 million key workers in its initial phase and another 270 million people by July. The vaccine, he said, is a triumph of Indian science, and – by extension – his Make in India policy.

The euphoric text of the Prime Minister’s speech was, however, spoiled somewhat by the warning that followed: beware, he said, the “false propaganda” about the vaccine’s safety. The very fact that Modi had to pay lip service to the existence of such propaganda is a clear indication of the growing political pressure to which he has subjected himself with his policy of atmanirbhar bharat.

Covaxin Controversy

Covaxin has been developed by an Indian biotech firm, working in partnership with the Indian government. It has been fast-tracked for roll-out to the Indian population in record time and, troublingly, before its phase 3 trials – the standard procedural checks for any new medicine- were completed. The expedited launch has been criticised by Indian and international healthcare experts. In a very short space of time, an anti-vax movement has sprung up in India, fuelled by scepticism about the effectiveness and safety of the vaccine.

The parallels between Covaxin and its counterpart coronavirus treatments in Russia and China, which were similarly approved for public use before phase 3 trials had been completed, are all-too obvious. The Indian people have been quick to spot this.

Activists allege that Covaxin’s manufacturer, Hyderabad-based Bharat Biotech, did not follow normal trial protocols. A trial volunteer died in December. Some volunteers claim that they were induced to accept jabs by being told that they would cure ordinary coughs and colds. Some were paid Rs750 (US$10) to take the jab. A worrying number of these volunteers have suffered side effects, including lethargy and vomiting.

Bharat Biotech has said publicly that the death in December was unrelated to the trial, and that it had conducted the Covaxin trials in compliance with the applicable protocols. The parameters and controls of these protocols have not been disclosed publicly by the company or by the government. The opposition party to Modi’s Bharatiya Janata Party (BJP) have made much political mileage from the fact that only, they say, 755 individuals participated in the trial.

Political Controversy

There is a pervading sense that the government has been hiding behind the biotech firm in an effort to avoid scrutiny of the way in which the vaccine has been developed and the thoroughness of the tests it has been put through. The opposition Congress party has aimed several questions at the government, focusing on the safety, pricing and availability of the vaccine, and stressing that an effective vaccination programme is “an important public service and not a political or business opportunity”. Congress is particularly exercised by the government‘s decision to export Covaxin before the majority of the Indian population has received jabs.

The Congress party has also highlighted the fact that the government will pay Rs95 more to Bharat Biotech for each Covaxin jab than it would for an Oxford/AstraZeneca jab, a striking anomaly given that Covaxin has been developed and produced in India and in conjunction with government scientists. The Serum Institute of India, the world’s largest vaccine manufacturer, has a contract with the UN-backed vaccine alliance Gavi to provide 200m doses of the Oxford/AstraZeneca vaccine. In response, the BJP has deployed the rhetoric of atmanirbhar bharat by accusing Congress of disparaging India’s achievements instead of sharing in a sense of national pride.

One central line of attack being followed by Congress is the detail surrounding the commercial aspects of Covaxin. Modi has made no secret of his intention to mobilise Indian industry to produce and supply Covaxin to global buyers, and Bharat Biotech has signed a deal to supply the vaccine to Precisa Medicamentos, a leading Brazilian pharma company.

A looming Public Health Disaster, made in India?

The rhetoric deployed by the Congress party to question the propriety and the economics of Covaxin is rooted in genuine concern amongst Indians that the vaccine has been produced in a hurry, in a non-transparent manner, and is fundamentally not safe. The jab is not yet approved for children, and amongst adults there is anxiety and scepticism. A poll conducted in January reported that some that 70 per cent of respondents were hesitant about receiving the Covaxin jab. The state of Chhattisgarh has refused to accept Covaxin until the phase 3 trials are completed and the test data have been made public.

The surprisingly swift and geographically pervasive growth throughout India of anti-vax sentiment has not been entirely whipped up by the Congress party‘s questioning and criticism of the government. The main dynamic motivating this social phenomenon, so significant that Modi was obliged to make reference to it in his national address and to dismiss it as “false propaganda”, is a groundswell of unease about the Prime Minister’s policy of Make in India, or Indian self-reliance. Indian-made goods are all well and good, but what if they are dangerous or defective? What if they put people’s lives at risk? Is this in effect what the Indian government is doing?

Could the political unwillingness of the Modi administration to rely on a foreign-made vaccine have led to what many now believe is a real danger, an untested and unsafe drug, made in India and sold by India, to be injected into the bodies of hundreds of millions of people in India and around the world?

In our earlier piece on Cofounderstown, Modi at a Crossroads, we discussed how increased political pressure from China has exposed the fault lines in Narendra Modi’s personal world-view of India. A policy drive to resist the US$75 million of cheap Chinese goods imported into India every year led to India‘s withdrawal from the RCEP. This move, we argued, is a manifestation of the deeper psychological level at which Modi views the rest of the world, which is (to some extent, post-Covid) still in awe of China and which relies on cheap Chinese imports to satisfy its consumer demands. And here we find the genesis of the policy of atmanirbhar bharat.

As soon as these words had left the Prime Minister’s lips in 2020, there was confusion as to the precise meaning intended to be conveyed. Several Ministers were quick to add qualifiers, pointing out that the intended sentiment was one of self-reliance, not self-containment or isolationism. Their admission of the darker connotations of the mantra atmanirbhar bharat was indeed portentous. These muddled words are a verbal manifestation of profoundly muddled thinking, which has led to several foreign and domestic policy twists that have entangled major international investors.

We discussed in our earlier blog “Why atmanirbhar bharat is not the way” the way in which the Make in India policy is busy frustrating potential inward investors like Amazon and Apple. Constant policy changes by the Modi government will alienate foreign companies, just at the time when the Indian government should be doing everything to smooth the entry of these players into the country.

But now though, with the rapid emergence of the Covaxin vaccine, and Modi’s personal sales mission to promote it not only to his own people but to foreign governments, we have to consider whether Make in India has taken a darker, and altogether more dangerous turn.

Because, if this vaccine is not effective, and is not safe, it will be ordinary people, in India and elsewhere, who will pay the immediate price. And thereafter, a bigger, longer-lasting price will be exacted by the rest of the world, both on the Modi administration and – more devastatingly for India’s economy – on the country’s industrial players and exporters.

MATTHEW FEARGRIEVE is an investment management consultant. You can read his business blog here and see his Twitter feed here.

Bitcoin Q1 2021: Time to Buy, or Say Goodbye?

Investment management consultant MATTHEW FEARGRIEVE discusses the huge inflows of investor money into Bitcoin as prices nudge US$40,000 this week, and asks: is Q1 Time to Hold, or Sell a Bubble?

The growth of the world’s leading cryptocurrency over recent months has seen price hikes of more than 300% over 2020 (by comparison, the S&P 500 rose 18%). In less than a month, it doubled its value to pass the $40,000 (£29,500) mark for the first time since Bitcoin’s inception.

Banks and investment firms are now cashing in to the surge in demand, by offering proxy access to cryptocurrencies via ETFs (exchange traded funds).

BTCetc Bitcoin Exchange Traded Crypto (BTCE), a German product, has recorded average daily trading amounting to €57m in the first 11 days of January, according to data from Deutsche Börse. Börse trading data show a number of trades above €30,000, which were unlikely to have been placed by mere day traders or other retail investors.

Elsewhere in Europe, VanEck and 21Shares also offering bitcoin ETNs on Deutsche Börse. The Swiss exchange now lists 34 crypto exchange traded products from six issuers.

On the other side of the Atlantic, Grayscale’s Bitcoin Trust, which like its German counterpart tracks the price of the digital currency, has posted average daily turnover of almost $1bn in the first two weeks of this year, amounting to more than nine-times the average in 2020, Bloomberg data show. Its assets under management have boomed to $23bn from $17bn at the end of December and $2bn at the start of 2020.

The sharp rise in trading in the securities highlights how investors are increasingly looking to gain exposure to or bet against cryptocurrencies on traditional markets rather than buying the digital currencies outright. The trading surge in BTCE this year — a sharp pick-up on the €15.5m daily average in December, the previous record — comes following a tenfold rise in the price of bitcoin since March to a peak of $42,000 earlier this month, before it gave back some gains.

ETF proxy access to crypto circumvents some of the regulatory concerns and counterparty risk involved in trading bitcoin and surely increases the appeal of cryptocurrency investments for both retail and institutional investors who can invest in the ETF without needing to set up specialised digital infrastructure or use an unregulated crypto platform.

It is worth bearing in mind, however, that cryptocurrency trading is the preserve mainly of retail players, and more speculative firms including hedge funds, as opposed to traditional money managers like pension funds, which remain nervous about bitcoin’s extreme volatility.

And let’s not forget the crypto warning issued this week by the UK financial regulatory body, the FCA, that investors should be prepared to “lose all their money” when invested in risky cryptoassets. The FCA also warned that some cryptocurrency investment firms may understate the risks and overstate the gains involved.

Christine Lagarde, president of the European Central Bank, joined in the doubters, calling on 13 January for global regulation of cryptocurrencies to help combat their use in “totally reprehensible money laundering activity”.

So what are the risks of Bitcoin and other cryptocurrencies, and should you invest directly through an unregulated platform (like Coinbase, for example, and you can read all about my problems using their platform here) or via a regulated ETF?

The primary factor that prospective investors should be aware of is that Bitcoin – and other cryptocurrency – is not equivalent to cash. Money converted into a cryptocurrency should be treated like money invested in any other investment product or asset – as capital at risk.

Resist at all costs the temptation to view the parabolic curve in Bitcoin prices as a personal get-rich scheme. For two reasons. First, because prices might not get much higher, and you are likely buying at a peak. Secondly, Bitcoin is like any other risky asset: and at the moment, crypto investors are caught up in a mindless buying frenzy, one which you should naturally be slow to join.

For me, Bitcoin has Bubble written all over it.

Don’t be fooled by some commentary into thinking that crypto has had overall buy-in by traditional allocators. There is plenty of talk of mainstream houses getting in, but the fact is they have shown with little action so far. For every institution interested in, or buying, crypto, there are several that are staying away.

Crypto and Bitcoin in particular is a risky, highly speculative market. Bitcoin is hardly regulated anywhere in the world, and the money you invest in it will likely not be compensated under government protection schemes (like the one in the UK, which the FCA warned this week would not protect crypto investors in the event of loss).

The persistent narrative underpinning Bitcoin has been that it is a decentralised currency that is somehow liberated from central bank tampering. The reality is that it is an (alternative) asset that has profited as much from an environment of incredulity as financial sense.

Coronavirus has played a part in this. Crypto is starting to look like an attractive alternative to currencies that may be devalued by the stimulus packages. The packages are needed but there are real concerns they may set inflationary forces in play. This also creates a new dimension of interest in Bitcoin, that of the cryptocurrency being a Safe Haven asset for 2021.

It is true that Bitcoin can, in theory, serve as a safe haven in such times of frenzy. Its rise in recent months has been driven primarily by concern over the sums that governments have thrown at the pandemic and the prospect of inflation that looms in their wake. To protect against the value of their investments being eroded by inflation, investors often like to hold a real asset (e.g. gold), to serve as a hedge.

Bitcoin can serve a similar role. Its supply is finite – only 21 million coins will ever exist. Unlike US dollars that can be printed, or gold that can be mined. Bitcoin is easier to transact than gold. In times of uncertainty, this gives it some – maybe purely notional- value.

Enter Goldman Sachs, who have reassured their clients that Bitcoin does not pose an existential threat to gold, (Bloomberg reports 18 Dec): “We do not see evidence that Bitcoin’s rally is cannibalizing gold’s bull market and believe the two can coexist“. Goldman did, however, admit that Bitcoin’s ongoing rally could steal some demand from gold investors: “Gold’s recent underperformance versus real rates and the dollar has left some investors concerned that Bitcoin is replacing gold as the inflation hedge of choice. While there is some substitution occurring, we do not see Bitcoin’s rising popularity as an existential threat to gold’s status as the currency of last resort“.

This, from Goldman Sachs, is clearly significant. The traditional move in markets as tumultuous as 2020’s would be to hedge against stock volatility with gold. This has proven an effective method in the past, but Bitcoin has ushered in a new era of digital currencies. As the leading cryptocurrency, Bitcoin has many of properties of a currency, but with some unique features that can make it a viable haven. You can read more about how Bitcoin stacks up against gold in my blog here.

For me, Bitcoin’s Safe Haven attributes are limited and should not be overstated. As for buying it now? Prices are too high, and in my view are unlikely to go much further. You would be buying at the peak.

The inflow of monies from small consumers, and the unease of national regulators, could contrive to render Bitcoin not only a Bubble, but a highly regulated Bubble. For many investors, big and small alike, Bitcoin is a risk asset that has Bubble written all over it. More of my personal 2021 outlook for Bitcoin and crypto in my investing blog here.

MATTHEW FEARGRIEVE is an investment management consultant. You can read his business blog here and see his Twitter feed here.