Correct at time of writing – October 2022
I have written this article on what the outlook might be and some options for those investors that prefer to have a stable portfolio that isn’t as volatile as equities. Those investors, that are looking for a fund for stability with inflation around and don’t want to take as much risk in equities may be worried about macro factors such as inflation, debt levels, energy crisis and some uncertainty over the Ukraine war with a Russian leader who is losing a grip on the war might be lead to do?
I have written about Chinese equities being an option for an investor that can take volatility. But, like any emerging market, it has uncertainty.
This article will look at some of the top bond funds and why I am looking at them now for portfolios that want stability.
If you have any questions on what might be the best investment for your situation, please email me at info@investmentsforexpats.com and I can assess your situation. Please note this is not financial advice nor am I recommending you invest in this product. If you need financial advice, please seek a qualified and competent professional.
Market Outlook
It’s a hard place to be right now for investors. With inflation being high and OPEC+ keeping oil prices high therefore from a company’s perspective looking at stable companies that are defensive (I.E used in a rescission) and have a good brand name that can pass on the price cost to consumers and have brand loyalty (I.E Unilever, Pepsico) should be in a good position in the medium run to do well.
Meanwhile, on a regional basis, Japan/U.K equities in the major developed market could be deemed value indexes due to the low P/E ratios and reasonable earnings compared to the U.S equities. However, a factor in the strong dollar that can be pressing up a lot of the earnings for global companies on the FTSE 100/Nikkei 225 with the weak pound and Yen (the latter more likely to go up due to BOJ not raising interest rates yet) and predominately get earnings in USD.
For Growth companies, I do see certain companies with good profits as a good option for investors right now. For example, Facebook (Meta) has almost the same profit and profit margins as it did in 2021 but the share price is 40% less. I see it as a good time to buy in for the long-term investor in growth companies that have been transformed into value companies due to the impact on the share price. Although short to medium term it most likely will be volatile. Fundsmith is looking to take advantage of this factor with certain buys in tech companies that are presently deemed at a discount.
https://finance.yahoo.com/quote/META/financials?p=META
From a Macro perspective on the emerging markets looking at Indonesia and Vietnam in the SEA region. Vietnam for being very much like a mini carbon copy of what China was 20 years ago with a lesser population and picking up more companies moving factories and regional HQs from the trade war for diversification outside of China. This is not only seen in the low-end skilled labour force but the highly skilled labour force with Samsung and Apple have put staff in the country. It also has a lower GDP per capita of just over $2500 per capita with a lot of room to grow.
India, although has problems with its government and corruption, it still has a low GDP per capita of $2274 in 2021 which is very low from the world’s perspective. Even with a modest growth rate of 6% a year (nothing like the Chinese in the 90s/00s or Japan in the 50s), it could obtain an $8,000 GDP per capita and thus will be the world’s third-largest economy with approx $10 trillion which will, in turn, reflect on the Indian stock market in the long run. It has in its favour a 100+ million English language workforce for outsourcing and a young workforce and top tech talent and a young population, unlike China).
Chinese equities. These have been hit by the Chinese lockdowns from Covid in 2022, the Chinese property market oversupply and debt. Due to the control the CCP has on the people and economy plus a number of reasons such as how reliant the world is on Chinese exports these aspects can be worked out by the CCP. More will be seen in the CCP party conference next week on potentially both of these factors. But, the Hang Seng is one of the worst performing indexes YTD and yet it has the most IPOs in 2022. The reasons stated above are why looking at Pacific Horizon trust and its slight weighting towards Chinese equities.
If you are wanting stability in this current market, please read on to see what I think offers stability in this current market.
Stability for Investors
Stable investors, I still look towards low-duration bonds. Too much volatility in the price for long-term duration bonds. But, with yields getting higher and talk of the feds funds rates going to 5% due to the fed looking to tackle inflation for the next year at least, this is looking more likely with low non-farms payroll just coming out, short-term bonds look a feasible option with less volatility and rising yields.
The type of bonds looking primarily to invest in are investment grade sovereign and cooperate bonds.
A fund to look for in a portfolio:
PIMCO GIS Low-duration opportunities fund Institutional Income – This is done by a fixed income specialist (PIMCO) with a low cost of 0.49%.
https://www.morningstar.co.uk/uk/funds/snapshot/snapshot.aspx?id=F000013BKU
Figure 1: PIMCO GIS Low duration bond performance (top) and holdings (bottom)
Now, it could be the time to argue if the 60/40 portfolio is back for the stable investor with a bit of a tweak towards short-duration fixed income. This has historically been the asset that would look to invest in during recessionary periods as equities have historically dwindled in this period.
I do think the bond market has been neglected for the last 15 years by investors on the whole. Although, in this time I have seen some good opportunities in some emerging markets such as eastern Europe and to a lesser extent Latin America. Now that yields are more than dividends on the S&P500 bonds might make a resurge in the portfolios as investors re-weight portfolios towards bonds again.
Some other options that you might want to look at are TIPS with inflation protection embedded in them.
I hope that you have found this useful for your portfolio and a brief outlook on the markets. If you do have any questions please feel free to email me at info@investmentsforexpats.com.
Summary
I hope this article has helped you to understand the market as it currently is through my eyes and what you can do if you are looking for stability. If you are looking for capital protected schemes, there are some potentially available depending on your situation and there are other options which offer a fixed return, however, I will need to assess your situation before allowing you to invest in them.
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