Where to invest in an age of uncertainty

Difficult times require a new approach to its investment strategy. The popular strategy to “buy broad index” or “buy one most profitable tool” now promise the investor a very high risk that is not kompensiruet the expected profit. First today out strategies requiring high level of expertise and solutions that give investors the opportunity to achieve their goals with minimum risk. Before deciding what to buy, you should answer two questions: at what point are the markets and how serious a threat are they existing fears.

Куда инвестировать в эпоху неопределенности

The state of the economy

In order to assess the current state of the markets, it is necessary to discard the factor of emotion and to understand where is the economy, because it specifies the status of long-term trends in financial markets. The economy lives in cycles: crisis cause the recession, the recession gives way to recovery, followed by growth, which at some point goes into the expansion. Today, most indicators of the economy indicates that its state of closest fits the description of the expansion stage.

At this stage, the growth rate of GDP always grows, publishes cyclical indicators of a strong and growing household consumption. That is the picture we see in key regions of the world: US GDP and the developed countries of Europe is growing by almost 3% per year, the consumption is at the highs of pre-crisis 2007, and indicators of business activity (PMI) rose above 50 points.

But rapid growth has a downside, namely rapid depletion of resources. In the US, unemployment is very low by historical standards, the level of 3.9%, the situation is similar in the countries-locomotives of Europe. Low unemployment forces businesses to compete for workers, raising their wages. Wage growth allows people to spend more on consumption, but the flip side of the coin is the increase in the cost of production for companies. Over time this mechanism leads to an acceleration of inflation that we can observe in practice, the price index in the US and the Euro area began to grow rapidly.

At the expansion stage in the economy the best result investors show preinflation and Pro-cyclical strategy. Bond markets in these conditions feel bad and make them become hard. Stock markets and commodity markets, by contrast, is expected to provide investors with a high yield, but “the devil is in the details”, and the choice of specific instruments should be approached very carefully.

The main risks

Now fears among investors three: more intense than necessary, the growth rates of world Central banks amid escalating inflation; the tightening of the regime of “trade wars” between the US and the rest of the world, and the collapse of emerging economies as a result of accumulated imbalances.

The first two risks, in our view, the market is now overestimated. Central banks have long been in making decisions look not only on inflation but also on the stability of the financial system and the stability of economic growth. In the current situation, the excessive increase in interest rates to combat inflation would be contrary to the other two goals. The regulators at some point easier to accept inflation above target levels than their hands to push the economy into recession. The scenario of a strong tightening of the regime “trade wars” as yet not look probable.

Input mode more stringent duties will harm the economy and financial markets, as it will “eat” the profits of companies, and the economy and markets — the mainstay of the election campaign trump, to which he is already beginning to prepare, as the General election is two years. Every time there is a good statistics from the labor market or the S&P 500 index highs, trump puts merit in it. To lose these benefits now would be illogical for him, namely, the American President remains the final decision on the “trade wars”.

The third threat is more real, and the realization of this risk, we see very well the example of Turkey and Argentina in 2018. But this “fire” is of local character and great danger to other markets does not create. Now need only to avoid flare-UPS in its portfolio.

How to invest

Back to the question “what should I buy?”. With all that said the shares should now be at the core of the portfolio of any investor. The more that is held in October, the correction gives an opportunity to enter the market at attractive levels. The bonds in the portfolio should remain, but their role is shifting towards a balancing mechanism that protects your investment from severe market fluctuations. A common approach to selecting securities in this market while should be conservative.

In the stock market, the investors ‘ focus now shifting from buying broad indices to specific investment ideas. Such ideas must meet three criteria. First, the paper should not be very expensive relative to the market as a whole. The purchase of shares in startups that do not yet generate a profit, but have a high potential, would be a reasonable strategy if the economy was still growing, but at the expansion stage of the risk there is already much more than the expected yield.

Secondly, the idea must have a clear focus and answer the question of why the profits of the companies in the selected sector of the market should grow faster than the market average. Thirdly, the idea needs to be resistant to the impact of market fears. Agree, other things being equal buy a company business is tied to trade with China or the Turkish market, it is now unreasonable — adequate premiums for the risk there. Of 5-6 such “bricks” can be easily folded quality portfolio.

What to invest

A good example of an investment idea that meets all criteria — the purchase of shares of companies in the defence sector. Growing geopolitical instability are forcing governments of most countries to increase defense spending, and the primary beneficiaries be the military-industrial enterprises.

Note — in conditions of growing economy the businesses of these companies and so I feel rather well: the portfolio is growing due to the increasing demand for civilian products and dual-purpose products. However, the growth of military spending allows them to build up a portfolio of orders beyond the expected in “normal” conditions and, therefore, to achieve the level of capacity utilization, which was previously inaccessible. This allows the profits of these companies to grow faster than in sectors where no such incentive.

Another example — company market digital. Most of them have learned to earn on your core business, whether it is in social networks or subscriptions in the segment of manufacturers of computer games. Such companies have employed business models that generate profit. But the development of technology, including a significant increase in computing power that allows faster data processing, increased data transfer rate, the introduction of virtual and augmented reality in the next few years will allow these companies to find new ways to monetize the existing audience they have, thus multiple times increasing their profit.

The significant potential we see in the biotechnology sector, where the whole “pie” can grow in case of new drugs. You can pay attention to individual local markets. A good example is the European market, which is much cheaper US market, and the profits of companies can rise faster due to the weak Euro. An example is the Russian market, giving the investor the highest dividend yield.