Wanted to elaborate on previous emails to clients about portfolio diversification and looking at both growth and value in the present market and how/if you should rebalance your portfolio. My aim is to highlight the current options for investment in the long term based on demographics, growth sectors and regions.
With most large-cap stocks being volatile over the last 4 months and nearing rescission territory defined as 2 consecutive quarters of negative growth in most developed nations. Have we hit the bottom of the stock market and is it the only way up?
The short and indecisive answer is, of course, no one knows for sure. Personally, I think with uncertainty still largely looming in the economies that are finding it hard to deal in non-transitory inflation environments and with the war on Ukraine it has the potential for a rocky ride.
Looking at the NASDAQ which is the majority of technology stocks, from 2018 it would state that reversion to the mean would still incur a significant drop based on this very simple and ineffective antilogy of the graph below.
One way to defend a portfolio is to only look at companies that are actually profitable with good profit margins and an intrinsic brand value, they should be key in any macro situation. Adding to this, if you have funds that are presently down for the year so far not to worry as most investors are thinking long-term and not pure speculators. Another way to view is that a fund or stock that matches the criteria above should be a good buy right now if it is cheaper?
If I want to rebalance what should I look at?
Having looked and sent emails with some value funds with no debt. I do think these could be a good addition to a portfolio if you are in cash and have the appropriate risk tolerance and situation. As I have mentioned before it’s the best out of a bad bunch of assets right now in an inflationary environment.
I am personally still favourable about long-term growth, however, having a good company (or fund) that is presently undervalued is a strategic part of stock/fund selection for any investor or advisor.
I’ve included this in one of my blogs before, however, one fund that does this looks at Benjamin Graham’s style of investing and I would highly recommend watching the link below for an insight on stock selection.
https://www.youtube.com/watch?v=lFizI-gQPh8
But what about growth?
Again, like a lot of things I don’t know who nor what is going to grow. However, looking at basic demographic trends and data tells me what sectors are likely to grow.
These are the death and health sectors.
One of the only certainties that can predict (not to sound morbid) is death and this is likely with an ageing population. Our investment in health care is great and making profound discoveries but that can only delay the inevitable.
https://www.ruralhealthinfo.org/toolkits/aging/1/demographics
In 2050, in the U.S alone the amount of people over the age of 65 is predicted to double. Firstly, this of course means that the death industry is going to be a lot bigger. Secondly, going to need more care and health innovation as governments will try to aim to tackle an ageing population.
We have seen advances in home-based technology in the last 20 years but you could argue that the same has not been seen in the health sector.
I have wondered if the health sector in the future will look at more innovative ways to make itself more efficient and what ways it can do this.
A thought I have had to myself is the Metaverse is currently used for mostly gaming. But, for health care this allows doctors to see more patients and even perform complicated tasks all at home? Will this be something that comes from the metaverse? Or is this complicating the system of just having current protocols over an app and telephone appointments?
Of course, with both these sectors, I would not want to guess on individual companies and in this case, I see an active fund as potentially better than a passive fund as inside knowledge of the sector could really be advantageous.
One for me is the Polar fund (this is just my view and not financial or personal advice) as it does have specialists in the field of Biochemistry as managers.
https://www.morningstar.co.uk/uk/funds/snapshot/snapshot.aspx?id=F00000QNP7
What alternative to equities do I have right now?
This is a challenge as I get asked frequently what can I do right now which is give protected returns past the real rate of inflation.
Only T Bills are deemed risk-free and looking for anything higher would come with an element of risk that you need to be able to consider.
For me, Structured Notes can offer an alternative to equities right now. These should only be offered to sophisticated investors that understand the risk and basic structure of structured notes.
One that I found interesting was this one offering a higher than inflation return with 100% protection in oil companies’ stocks (see below).
The risks are of course default by the issue (in this case Societe Generale) and illiquidity as returning the capital early will likley get less than what you put in.
https://www.structured-products.co.uk/#/
What if I have Chinese equities in my portfolio?
This could have several theses written on their own about this topic.
In brief, the long-term view is that China can’t afford to let their long-term GDP decline due to movement against the CCP. This is likely to therefore ease lockdown.
Of course, Chinese equities come with risks such as regulatory, and misleading accounting to name just a few. Most investors in China will be long-term high risk and see little sense in selling now while it’s currently low.
I have done a number of blogs on China, and I am more optimistic for a number of reasons. A short summary on one aspect is the growth potential:
Due to its size of 1.4 billion and with GDP per capita still a quarter of what the U.S is this only needs to double to $30,000 per capita to nearly double the U.S GDP. I see Chinese companies with a lot of growth which should create a growing middle class and Chinese tech companies getting into EM markets in the region such as Indonesia that alone has 275 + Million and a growing GDP. I see this as a lucrative move by Chinese companies.
The video below explains a lot more about equities and the macroeconomics of China.
Conclusion
Who knows what is going to happen next, however, I believe that there could be a bit further to fall, however, I prefer to focus on what we can do rather than speculate on what might happen. The two areas that I see as growing is the death and healthcare sectors. My reasoning for that is that trends and data show that there are ageing populations.
If you do have any questions on your portfolio or want to go through any specific aspects individually please feel free to email me at info@investmentsforexpats.com.
