Investors recently got another painful lesson in the dangers of trying to time the market. With cash flooding into money-market funds, the S&P 500 shot up more than 20% from its low in October.
The investor skittishness is understandable. While a default of US government debt was avoided, the threat of a recession looms and the market rally has been fueled by a narrow slice of stocks. That has some market-watchers predicting a sharp fall — while others say all the cash on the sidelines could flow into the market and keep a rally going.
The uncertain outlook has some of the experts who shared investment ideas with Bloomberg pointing to trends such as the growing need for cybersecurity, and the move to diversify supply chains away from China. Bitcoin and Ethereum also get a nod for their long-term potential in an unsettled financial world.
When the experts were asked how they would spend $1 million on a personal passion, answers ranged from a classic car used in James Bond movies to a portfolio of baseball cards to outfitting a house so it can become completely energy-independent.
Before putting new money into the market, take stock of your finances and investments, either on your own or with a financial adviser, to strengthen them where you can. For inspiration, take a look at The Seven Habits of Highly Effective Investors.
Stephanie Luedke, head of NB Private Wealth
Moving into Private Credit
The idea: When choosing to invest in this environment, it really comes down to when will we see the yield curve begin to normalize, which will incentivize investors to put more cash to work and move out of money-market funds. Public fixed-income markets could be the first stop on that journey, particularly if default expectations remain reasonable. One alternative for investors is an allocation to private credit, an asset class that has flourished over the last decade.
The strategy: Providing liquidity directly to a variety of borrowers, including small- and medium-sized businesses, real estate developers and distressed entities, warrants a higher yield on the debt. Beyond the more attractive initial yields, the floating rate is an additional benefit in this volatile interest-rate environment. In short, private credit can function as a yield and/or total return enhancer within portfolios by offering a combination of income and capital appreciation, along with diversification benefits. Investors should look for a provider with relationships to the private equity firms themselves. This allows the provider to see differentiated deals and be selective in choosing assets. – Amanda Albright
Alexandre Tavazzi, head of CIO office, Pictet Wealth Management
Changing Supply Chains
The idea: When you think about the next five years, you can’t look at the world like we did five years ago. A lot of companies are talking about the diversification of supply chains — thinking about where they produce, whether that place is efficient and if they need to have a back-up plan. We saw in the pandemic that depending on one country for your manufacturing can be very dangerous: If China stops functioning you can’t produce because you have no supply.
The strategy: With geopolitics having such a significant role today, manufacturers have to look at what countries are allied with their home country. You can see companies diversifying production to Southeast Asian countries such as Singapore, Vietnam and Indonesia. India, too, because India under Modi wants to become a real alternative to Chinese manufacturing. India launched a very ambitious plan to support companies that want to produce there. The infrastructure is not on the same level as China, but Modi wants to develop it and already on the trade front you can see that in the past two years Indian exports to the rest of the world are up 90%.
Investing in changing supply chains gets tricky. It’s not easy for coporations to get into the Indian market quickly, as the country’s infrastructure — such as the power supply or transportation networks — still needs to be developed. Vietnam, the country everyone mentions as a main beneficiary of supply-chain diversification, is very small. You have to understand which sectors are favored in each country, because they don’t all have the same level of manufacturing sophistication and quality.
As an example, some Chinese suppliers are moving to India together with phone makers to improve manufacturing quality on site. For the time being, assembling the most sophisticated phone still remains a challenge in India, but it will become a reality in the future. And winner takes all in this world, so you have large companies installed in these countries that may be getting the largest share of production at the expense of the smaller ones. – Suzanne Woolley
Ophelia Snyder, president and co-founder, 21Shares
Bet on Bitcoin
The idea: The US government recently increased the debt ceiling and is heading toward a large refinancing. And it’s combatting inflation with higher interest rates, which will become a key driver of the deficit. This will come along with increased instability for banks. Ultimately, this is good for Bitcoin— it’s why it was created. I’m really bullish on the mid- to long-term vision for Bitcoin in the context of banking, and Ethereum in the context of cross-border payments and artificial intelligence.
The strategy: Bitcoin was meant for bank runs — it was meant for these moments where the “not your keys, not your coins” concept comes into play. Additionally, cross-border payments in the wake of the Ukraine conflict is another major narrative and speaks to the increasing need for the decentralization of the financial structure. In this context, assets like Ethereum are going to be increasingly important and relevant on a global scale.
Lastly, everyone is chasing AI-driven investments and that’s great. AI and blockchain go hand-in-hand: You need a smart contract to fulfill a lot of the vision people are currently discussing around AI. This is a strong tailwind for platforms like Ethereum. Ethereum is the biggest player in the space currently but a lot of these other blockchains are more specialized for certain types of transactions — names like Polygon, Solana, Polkadot and more. I’m quite interested in smart contract platforms more holistically, with an over-allocation to Ethereum. – Claire Ballentine
Thorne Perkin, president, Papamarkou Wellner Perkin
Invest in Cybersecurity
The idea: The need for cybersecurity to safeguard the digital world is a megatrend, cutting across every sector of technology. It is an expansive category, from companies using Big Data, machine learning and artificial intelligence to become leading IT firms. In 2023, nearly $190 billion will be spent by end users on information security and risk management and in 2025 that’s projected to rise above $239 billion, according to Gartner.
Microsoft, Amazon.com, Facebook, Adobe — they’re all obviously pouring money into it because a security breach for one of those companies would be disastrous. A McKinsey report projected that over the long run, the addressable market could be as much as $2 trillion.
The strategy: We’ve met with a lot of private equity groups investing in this space over the years, and we’ve invested with Evolution Equity Partners. They’re an international venture capital company started by a bunch of investment and technology entrepreneurs with operating experience, and they have experience taking companies public. Like any of these areas exploding in size you really need to focus on where you invest and on the team — whether they have a track record in sourcing transactions and competing for and executing transactions.
The companies in the fund are involved in areas including cloud security, the internet of things and application security, and adjacent categories including blockchain, quantum software or AI and risk management. Each fund targets a mix of earlier stage and some mid- and late-stage, but all pre-IPO. The fund typically makes an investment between $20 million and $100 million and they want to get in at a good inflection point, where the early-stage risk has been mitigated and the company’s revenue growth is accelerating. – Suzanne Woolley
Todd Jablonski, chief investment officer, head of asset allocation, Principal Asset Management
The idea: A globally diversified 60/40 stock-bond fund continues to make a great deal of sense. Especially now, as the positive correlation between stocks and bonds may have peaked. Asset allocation moved out of vogue toward year-end 2020 as the correlation between stocks and long-term government bonds rose sharply. By the end of May this year their trailing 12-month correlation stood at +0.60, near recent 2023 highs and at levels not seen since the late ‘90s. Peak correlations underscore an opportunity due to mean reversion and fundamental forces that point to a falling correlation.
The strategy: I’d invest $1 million with an underweight to equities, at 58%, and an overweight to fixed income at 42%. Within equities, I’d underweight the US to a 32% target. While the US economic picture looks resilient, the outlook is poor relative to other economies. Within US equities, we prefer large-caps (about 23%) for a low volatility profile, remain neutral on mid-caps (about 8%), and we’d underweight small-caps to around 1%.
Diversification via a 20% weight to developed ex-US markets and 6% to emerging market equities seems reasonable. Europe features positive momentum and cheap valuations, while Japan offers a strengthening economy and potential Yen appreciation. Emerging markets tend to be idiosyncratic, but China’s economic path forward holds investment appeal, as do the low, low valuations in Latin America.
In fixed income, the tactical outlook for lower-volatility core fixed income is positive. Treasuries (a target of 9%), mortgages (12%), and investment-grade corporates (12%) feature good levels of income, and our medium-term view is that a US recession will ultimately put further downward pressure on yields. Smaller positions in non-core preferred securities (3%), high-yield bonds (4%) and emerging market debt (2%) provide a diversifying underweight to higher-volatility fixed income. – Claire Ballentine
Source from: Bloomberg