How to build an investment portfolio in an era of high rates

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Around since 2014 there has been a vigorous debate about a rate hike by the Federal reserve system of the United States, which, as we have seen, finally led to results. The US economy went on a growth trajectory, interest rates are rising, the era of cheap money ends. The folding of the American program of quantitative easing and the first rate hike in us bond funds almost did not react. But after December 2017 fed rate reached 1.5% and the market was finally confirmed in the opinion that their course the fed will not deviate, bonds began to show a downward trend.

So soon the quiet life will not. If early conservative investor could choose almost any strategy of investing in foreign fixed income instruments and then to watch as his portfolio becomes more expensive every year, but now this approach may lead to losses in the next couple of years.

This year bond strategy turned negative, unlike, by the way, from those who guessed right and bought the stock growing sectors. So, if the funds are highly reliable bonds of the Western companies lost in the price about 1.5% and high risk bonds is about 3%, the equities of issuers from the energy sector increased by 6.7%, IT sector — 12.4%.

Now, to earn anything, will have to act.

Как собрать инвестиционный портфель в эпоху высоких ставок

What to do

Now, the market expects about five rounds of rate increases by the fed. Therefore, even cautious investors should think about hedging risks. In addition, a number of signs indicates a possible slowdown of the US stock market or even a correction. Many animators point to the overvaluation of the broad market index S&P 500. This, for example, P/E ratio (the amount of net income necessary to repay the market value of the securities), which at the moment is at the level of 20,46, with an average value over the last ten years of 17.6.

A similar pattern can be observed in other multiples such as P/B and P/FCF, which demonstrate a ratio of current value of companies to their book value and free cash flow.

People who want to devote part of their savings in the stock market will have to come to terms with the idea that now the process should be approached more consciously, and begin to pay attention to the choice of assets for your portfolio. For those who want to get to the end of the year the usual “plus 10-15 percent,” is now considering how the market situation affects every asset class. And, possibly, to revise the structure of its portfolio and its composition. What can be done now?

Two strategies

Depending on the risk profile we can offer two basic scenarios of adjustments to your portfolio when investing in the international assets market. Those who are more inclined to risk, you can increase its position in the stock. Conservative investors should go into shorter term bonds which are less susceptible to negative factors. Let’s discuss each of the options.

1. To increase the share of stocks in the portfolio

For moderately conservative investors who allow the planting of portfolio to 15-20%, I can advise to divide your portfolio into two halves and invested 50% in fixed income instruments: 25% — in deposits and 25% in short-term bonds. The remaining 50% can be distributed as follows: 10% to invest in a hedge tool gold, 10% to bring in cash and 30% to distribute among the promising sectors of the stock market. To these we can include the paper of Western companies in the consumer, pharmaceutical (not including the risky segment of biotechnology) and energy sectors.

We believe that the horizon of up to three years, these companies will show significant growth. The expected profitability of such a strategy on the horizon up to three years can be up to 10% with a possible drawdown of up to 20%.

2. Buy short-term bonds and to reduce shares

More cautious investors who do not chase high returns and, accordingly, are not ready to losses, I can advise to concentrate 80% of the portfolio in three-year bonds of reliable issuers. It could be BFL and paper companies such as Sberbank, VTB, Gazprom and others. The remaining 20% can be invested in more risky assets. For example, the action foreign high-tech companies.

We can advise not only to invest in these securities directly, but to use the “boxed solution” in the form of an organizational product or policy investment life insurance — in this case, the participation rate in the same Fund shares of technology companies will be higher than with direct investment, through the use of derivative financial instruments.