Stocks: Top tips to navigate stormy markets
The current slide in the stock markets may be spooking some investors as all they see is red on their monitors.
Global equities continue to tumble as fears of conflict in Ukraine persist and the prospect of higher interest rates looms. Amid this sea of red that has engulfed global markets, there are steps investors can take to protect their portfolios.
Staying cyclical, positioning for rising rates, building in some defence, not giving up on tech in the long term and using commodities as a geopolitical hedge are the top tips from UBS Global Wealth Management’s latest CIO investment strategy insight report to navigate the current volatility.
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Despite the recent headwinds, economic growth remains, and UBS GWM thinks this should continue to benefit cyclical companies and value stocks.
On a sector level, this includes energy companies, which have lagged the rise in oil prices and are priced for Brent crude (BZ=F) around $0/bbl rather than the current $85.5/bbl.
In regional terms, The Swiss bank´s wealth management arm believes Eurozone equities will be among the main beneficiaries of global growth, while also offering undemanding valuations.
Positioning for rising rates
Although the chief investment officers at UBS GWM do not believe the Fed will tighten aggressively enough to undermine growth, they predict three rate rises this year, starting as soon as March. This should support a further increase in 10-year US Treasury yields to 2% by June and 2.1% by the end of the year.
This is likely to drag more heavily on the valuations of growth sectors, such as tech, versus value sectors, including financials — which typically outperform as yields rise.
Senior loans, which offer an “attractive” 4.4% yield at present, are also well insulated from Fed hikes by their floating-rate structure Investors also need to build some defences.
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Building in defence
Investors should resist the temptation to exit the market during periods of panic. But adding in stabilisers to a portfolio can help reduce volatility without sacrificing long-term returns.
Such stabilisers can include exposure to more defensive sectors, such as healthcare, which currently looks attractively valued in UBS GWM’s view.
Alternatives, including hedge funds and private equity, can also play an important role in portfolios in turbulent markets. Select hedge fund strategies are designed to outperform when equities are falling, while private equity funds keep investors focused on the long term, protecting them from the impulse to sell in times of uncertainty. Investors can also consider systematic strategies that can switch into safer assets when market momentum or economic fundamentals deteriorate.
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When it comes to tech, investors need to think long term.
The tech sector has been most impacted recently by rising yields and underperformed again on Monday. But the sharp fall in many high-quality tech firms is also creating opportunities for longer-term investors to add exposure.
More broadly, UBS GWM sees particular upside for companies exposed to three major enabling technologies: artificial intelligence, big data, and cybersecurity.
The Swiss bank expects these “ABC technologies”, along with 5G, to grow faster than the tech sector overall. Healthtech and greentech firms are also well positioned to benefit from secular trends, it said.
Volatility selling strategies can enable investors to earn a yield while waiting to potentially buy into secular growth at a discount, a strategy UBS GWM thinks is particularly attractive amid the recent sell-off and the pickup in volatility
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Commodities as a geopolitical hedge
While geopolitical events have historically tended to only have a temporary impact on markets, investors who are concerned about the threat of a major escalation between Russia and Ukraine could consider adding exposure to energy stocks.
These would likely benefit from a deterioration in the dispute and are attractively valued anyway, UBS GWM said.