Mon. Sep 25th, 2023

Where to Invest $10,000 Right Now

To say that investors face daunting challenges today is an understatement. Soaring inflation and rising interest rates have dealt a powerful punch to stock market valuations, recession is a word you hear more on more people’s lips and Russia’s invasion of Ukraine is entering an even more uncertain phase.

In the face of such gloom, we turned to five veteran investment advisers to ask where they see pockets of opportunity. Our panelists have some competing ideas about which types of stocks are set up to perform well in an environment of relatively high inflation and slowing economic growth. Some say investors should seek out US consumer companies, while others point to areas such as European aerospace and defense firms. They’ve also come up with alternative investment ideas for where they would spend $10,000 if it fell into their lap: pre-booking 2023 travel to Hong Kong and Macau at current reduced prices, or buying art such as California plein air oil paintings.

For investors who like to invest using exchange-traded funds, Bloomberg Intelligence ETF analyst James Seyffart provides suggestions for rough proxies for the ideas laid out by the experts.

In such an uncertain time, it pays to make sure that you have enough cash or access to liquid investments to cover surprise expenses or loss of income if a recession were to put pressure on your industry. You don’t want to be forced to sell off stocks during a downturn. To see if you can check off all the tips on how to build a solid financial foundation, take a look at “The 7 Habits of Highly Effective Investors.”

Russ Koesterich

Portfolio manager, BlackRock Global Allocation Fund

Going for GARP

Recession fears are now competing with inflation for investors’ attention. The economy will likely slow, making earnings growth harder to come by. With equity markets continuing to struggle and a lack of viable hedges available, a sensible strategy is to make your portfolio more resilient.

To get there, investors should look to an investment style known as GARP — growth at a reasonable price. It’s a designation for companies that typically lie between so-called pure value and growth stocks. Value stocks tend to be the cheapest based on metrics like price-to-book or price-to-earnings, while growth stocks experience the fastest earnings growth. GARP stocks are in the middle. For example, one way to measure this attribute is with a PEG ratio, which divides the P/E of a company by the expected growth rates; the lower the PEG ratio, the more attractive the stock.

Year-to-date, GARP names have performed in line with the market. While GARP is an effective, all-weather style, it can struggle when inflation is accelerating. However, the environment may be shifting again. Inflation is probably close to peaking and investors are becoming equally concerned with slowing growth. Many growth names were overpriced, but their unusually high pandemic premium has dissipated. Going forward, investors should revisit profitable growth stocks where valuations have become more reasonable.

How to play it with ETFs: The Invesco S&P 500 GARP ETF (SPGP) is a pre-packaged passive version of this trade, said Bloomberg Intelligence ETF analyst James Seyffart. It’s not a perfect match, but the fund invests in 75 stocks generally considered to be growth stocks but which also exhibit quality and value traits. The stocks are weighted by these fundamental growth characteristics, which further gives the ETF a differentiated exposure from traditional market-cap weighted funds.

Performance of last period’s ETF plays: The Invesco DWA Consumer Cyclicals Momentum ETF (PEZ) and the Vanguard Consumer Discretionary ETF (VCR) are down 21% and 19%, respectively, since the last “Where to Invest $10,000” edition was published on Oct. 12.

Another way to play it: By now we can all agree inflation is not transitory. While price gains will decelerate, inflation is unlikely to revert to its pre-pandemic norm. How, then, can you hedge inflation’s impact? Consider buying agricultural commodities. No, owning a warehouse full of wheat or thousands of acres of farmland isn’t practical, but you can buy shares of domestic producers of wheat, soy and maize. Geopolitical risk is unlikely to fade — Russia and Ukraine are major exporters of all three commodities — and extreme weather is hampering production in other places, notably India. Supply is likely to stay tight.

Ian Harnett

Chief investment strategist, Absolute Strategy Research

The Best Strategy Is Defense

Even before the Ukraine crisis, the prospects for global economic growth were starting to wane. They weakened substantially last quarter. Higher commodity prices and rising bond yields also point to lower earnings, and our models suggest that profit growth will be close to zero by the end of 2022. This says to us that equities should underperform bonds.

While many investors fret about the risk of stagflation, we see inflation moderating as economic activity slows. This should create downward pressure on longer-dated bond yields — even as the Fed raises rates. However, the rise in bond yields last quarter has shifted the relative attraction of equities versus bonds. Our models now suggest that it is time to sell equities and buy bonds on a 12-month view.

Slowing growth and weakening pricing power also suggests investors should buy defensive equities — those that have relatively stable earnings regardless of the ups and downs of the economy or stock market, such as utilities and stocks of retailers that make products people can’t live without — while avoiding cyclical areas, or areas more closely tied to those ups and downs, such as autos and real estate.

Although aerospace and defense companies have done well recently, they are well below 2019 relative levels and may be a way to take advantage of increased defense spending. Also, despite the clear need for Europe to shift from Russian oil and gas toward renewables, the European alternative energy stocks have underperformed traditional energy for much of the last 18 months. There should be good upside for a basket of these stocks.

How to play it with ETFs: There are three aerospace & defense ETFs on US exchanges, Bloomberg Intelligence’s James Seyffart said. The largest is the iShares US Aerospace & Defense ETF (ITA), which has almost $4 billion in assets. The ETF tracks the Dow Jones US Select Aerospace & Defense Index, which is rather top-heavy with Raytheon Technologies Corp. and Lockheed Martin Corp. accounting for 39% of the fund. Its expense ratio is 0.42%. The cheapest of the three is the SPDR S&P Aerospace & Defense ETF (XAR) with an expense ratio of 0.35%. While XAR and ITA have very similar holdings, XAR is an equal-weighted portfolio. That will create more volatility but also more potential to outperform or underperform over specific time periods. The Invesco Aerospace & Defense ETF (PPA) tracks the market-cap weighted SPADE Defense Index and has an expense ratio of 0.59%.

Performance of last period’s ETF plays: The WisdomTree US Quality Dividend Growth Fund (DGRW) is up 3.2% since last October.

Another way to play it from Harnett: I love both trekking and photography. Like many, I have always admired Ansel Adams’ photographs of US national parks. It would be great to follow in his footsteps. Rather than fly or drive, I would prefer a more leisurely approach and take the train. Amtrak advertises a two-week schedule that starts in Chicago and heads to Yellowstone via Salt Lake City. San Francisco and Yosemite are the next stops before heading north to Seattle and Glacier National Park, and returning to Chicago. What a trip — and what a chance to photograph some of the most awesome scenery the US offers.

Melissa Weisz

Wealth adviser, RegentAtlantic 

Well-Priced Inflation Hedges

There are two primary forces affecting markets today: inflation and interest rates. Broadly speaking, inflation puts pressure on profit margins and is a drag on consumer sentiment. And while inflation by itself is problematic, higher rates are a headwind to economic growth and valuations for many sectors.

But so-called value stocks — those seen as underpriced — should remain profitable in an inflationary environment. They’re also likely to manage interest-rate risk better than the broader market. We currently favor the value-investing strategy to both hedge inflation and benefit from increasing yields.

With a stock that is profitable now — versus a stock that’s richly priced based on the assumption of big future growth — you can more easily calculate how years of higher interest rates might affect its bottom line. With certainty hard to come by today, investors are now willing to pay more for that predictable cash flow.

The financial sector represents the largest weight in a deep-value strategy, and it’s one of the few areas that typically benefit from higher interest rates. On top of that, financials are among the most attractively valued stocks in the S&P 500, while the companies that make up the sector are in a position of relative strength, with strong balance sheets and reserves, in the event of a weaker than expected economy.

While value stocks tend to be cyclical and more vulnerable to economic downturns, we believe the economy remains on solid footing to continue growing, albeit at a slower pace because of tightening monetary conditions. When faced with inflation, near-term profitability is more important than longer-term cash flows.

How to play it with ETFs: The cheapest option for a value ETF is the Vanguard Value ETF (VTV) at 0.04%. It is market-cap weighted, with over 350 large-cap stocks, which means it is gives investors just a slight tilt to value, said Seyffart. Another option is the iShares Focused Value Factor ETF (FOVL), which has a 0.25% expense ratio. It gets the highest factor intensity rank for value ETFs in the Bloomberg Intelligence Factor Spectrum system, which means it’s likely to have the highest resemblance and exposure to the value factor. The ETF is currently over 70% exposed to financials.

Another way to play it from Weisz: I’ve dreamed up all sorts of ideas for home improvements after spending two plus years working remotely and hybrid, and in my case, with active kids at home. After a long winter, we’re eager to get back outside and enjoy the warmer weather, and wouldn’t it be nice to build a treehouse for hours of play, adventure, and a hangout spot with friends? I wouldn’t count on a treehouse to add value to your home, but a 2021 Zillow survey found listings that featured treehouses sold for a 2.2% premium. A treehouse may be a turnoff for some buyers, but a high-quality structure could set a house apart for the right family. A treehouse may also mean higher homeowners’ insurance premiums but is an investment in quality of life.

Sarah Ketterer

Chief executive officer and fund manager, Causeway Capital Management

Darkness. Then Dawn

Markets typically discount future events many months before they occur. In our current world of massive monetary liquidity, with historically high levels of investment in all types of assets, this anticipation mechanism is working in overdrive. 

Many cyclical stocks have underperformed markets this year, yet the Federal Reserve, the European Central Bank and many other major central banks have just started to tighten monetary policy to dampen demand. Some stock prices already reflect a global recession. Although equities can partially hedge inflation, economically sensitive stocks — financials, industrials, consumer discretionary, etc. — usually fare poorly as economies slow.

While energy has soared this year, other cyclicals have lagged. The present surge in inflation, amplified by supply-chain disruptions, the Russian invasion of Ukraine, the scarcity of commodities and labor and so on, may prove fleeting, alleviating price pressures in economies globally. That should give central banks a reason to cut interest rates. And from the depths of an economic slump invariably springs the next cycle.

The best of the cyclical stocks, those well-positioned competitively, are likely candidates for outperformance as markets anticipate the re-start of economic growth. A disciplined strategy of buying world-class cyclical companies during the downturn may prove very rewarding when markets begin to price in recovery.

How to play it with ETFs: The most popular consumer cyclical or consumer discretionary ETF is the Vanguard Consumer Discretionary ETF, said Bloomberg Intelligence’s Seyffart. The market-cap weighted fund holds over 300 consumer cyclical stocks and is dominated by large-cap exposure. This fund is extremely cheap for the category, at 0.10%. A more concentrated ETF is the Invesco S&P 500 Equal Weight Consumer Discretionary ETF (RCD). The fund is more expensive, at 0.40%, and has just over 60 holdings.

Performance of last period’s ETF plays: The VanEck Semiconductor ETF (SMH) and the SPDR S&P Semiconductor ETF (XSD) are down 4.5% and 9.1%, respectively, since last the last “Where to Invest $10,000” was published.

Another way to play it from Ketterer: Only Beijing can determine when lockdowns in Hong Kong and Macau end and normal life begins. As tourist locations, both Chinese Special Administrative Regions have much to offer, but no one knows when visitors can arrive without enduring endless testing and grueling quarantines. One way or another, Hong Kong and Macau must re-open. Meanwhile, some of the world’s most luxurious hotels and embattled Asian airlines would gladly take reservations for 2023 and beyond. Look ahead to a future escape in hotel, gaming, shopping, and dining paradise — at today’s bargain prices.

David Wright

Co-founder, Sierra Mutual Funds

Commodities will be attractive for the foreseeable future. We have the highest allocation to commodity funds that we’ve had in 34 years. We have an unconstrained strategy that’s reflected in the Sierra All Asset Tactical Fund, which is about 15% in commodities.

The case for commodities has everything to do with the dollar losing purchasing power in the US, relative to inflation, but also the gradual rise in global prices for natural gas and oil. When we think of the known unknowns, we think that the preponderance of surprises will be to the upside. Food inflation is a global phenomenon, and Russia and Ukraine were Nos. 1 and 5 in export of grain before the war. There are a ton of developing nations that have been heavily dependent on the export of grain from those countries. I think we’ll see a continued marching forward of prices in food commodities and probably other agricultural commodities, including lumber, and in industrial metals.

The volatility of commodity funds is slightly more than the volatility of the S&P 500. So if an individual has been comfortable owning the S&P 500, which is a lot tamer than the Nasdaq or a collection of individual stocks, they should be comfortable with the risk of the commodity funds. If an investor buys GSG, the iShares S&P GSCI Commodity-Indexed Trust, it’s a diversified exchange-traded fund and they should be very happy with that. Among mutual funds, the Rydex Commodities Strategy fund (RYMBX) and the PIMCO CommoditiesPLUS Strategy fund (PCLPX) are good choices. I would say the potential of commodity funds gaining 10% over the next six months is pretty good.

For 34 years, our risk management position has involved using trailing stop losses on each holding, recalculated daily. [As a stock price moves, a trailing stop-loss, which is pre-set to sell at a certain percentage of loss, adjusts along with it.] An investor could recalculate it weekly. I would say that using a 7% trailing stop under a commodity fund would be fine, and they’ll never take a round trip if they’ve held it for several months. The trailing stop will protect them from anything worse.

How to play it with ETFs: The largest broad commodities ETF and most obvious choice is the Invesco Optimum Yield Diversified Commodity Strategy No K-1 ETF (PDBC), said Seyffart. The fund has been one of the best-performing broad commodity ETFs during this commodity bull run, but comes with a relatively high 0.59% expense ratio. If you’re looking for something cheaper, the Abdrn Bloomberg All Commodity Strategy K-1 Free ETF (BCI) and the GraniteShares Bloomberg Commodity Broad Strategy No K-1 ETF (COMB) either track or are benchmarked against the Bloomberg Commodity Index. Both charge 0.25%.

Another way to play it from Wright: One of my friends is a notable lay expert in California plein air landscape paintings of the early 20th century, and we have co-invested a few hundred thousand in notable artists. We go to auctions at the major auction houses, and are buying these for investment, and they’ve done well over the past decade. One artist we’ve bought is John Frost. I have a couple I own personally outside of our investment portfolio.


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