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With the Dow Jones having been in a bull market for over nine years, many investors may be worried about a coming crash. Of course, identifying when stock markets will fall is easier after the event, rather than before it. However, the potential for a full-scale trade war between the US and China has the potential to cause a period of high volatility.
As a result, investing in shares with defensive characteristics may be a sound move. Gold miners such as Centamin* (LON:CEY) and Randgold Resources* (LON:RRS) have been unpopular in 2018. But over the medium term, their low valuations, rising profitability and status as a store of wealth could mean they generate high returns.
Recent developments regarding tariffs being placed on imports by a range of countries are likely to be a cause of concern for investors. In fact, if the tariffs announced by the US, China, EU and other countries are fully implemented in the coming months, the IMF estimates that global GDP will be 0.5% lower than its current forecast by 2020.
While 0.5% may not sound like a significant amount, the potential for a full-scale trade war means that investor sentiment could come under pressure. Share prices may endure a more difficult period if global growth is negatively impacted by proposed tariffs. And with the situation continuing to exacerbate, it could be easy for the US and China to gradually impose further tariffs over the medium term.
Store of wealth
As a result, holding defensive shares within a diversified portfolio could be a sound move. The gold price has fallen by over 7% this year, with rising US interest rates and increasing investor confidence holding back its performance. However, should tension between the US and China increase, gold could become a more highly-demanded asset.
Gold miners such as Randgold Resources and Centamin may therefore hold investment appeal. Randgold Resources has a net cash position of $740 million, which could be sufficient to fund its exploration activities over the medium term. This could mean that dividend payments increase, with the market anticipating a dividend yield of 5.3% in 2019. With the stock trading on a PEG ratio of 1.6, it seems to offer a margin of safety.
Similarly, Centamin could prove to be a sound defensive investment. After a mixed period, its EPS is forecast to rise by 5% this year, with growth of 17% expected next year. Its dividend yield is forecast to be 5.7% next year, with a PEG ratio of 0.8 suggesting that it could be undervalued. Although the company is reliant upon a single site for its production, its low valuation may factor in this risk.
Clearly, there is a good chance that a full-scale trade war will not take place. As a result, continuing to hold a variety of stocks appears to be a sound move. However, the risk of a possible trade war plus the investment appeal of gold miners such as Randgold Resources and Centamin suggests that holding them could be a worthwhile move.
* Robert Stephens owns shares of Randgold Resources and Centamin.