Stay the course – with a robust portfolio
US FEDERAL Reserve chairman Jerome Powell’s remarks at the Jackson Hole economic summit last week were the salve that stock and bond markets craved.
He opened the door to rate cuts, now widely expected in September. Policy is in restrictive territory, he said, and “the baseline outlook and the shifting balance of risks may warrant adjusting our policy stance”. Not surprisingly, investors took that as a green light for risk. The Dow Jones Industrial Average surged by more than 800 points on Friday; the S&P 500 rose 1.5 per cent; and Treasury bond yields fell.
Is the coast, however, clear for investors? Not quite. Even with the positive tone, worries persist over US jobs, where the July report was worse than expected. Inflation may worsen as well. As Powell said, “risks to inflation are tilted to the upside, and risks to employment to the downside”.
Still, if you are still sitting on the sidelines, it may be a good time to put spare cash to work, despite concerns about lofty valuations, particularly among US large-cap technology stocks. In the year to date, the S&P 500 has risen by nearly 10 per cent.
In a note last Friday (Aug 22), Vasu Menon, OCBC managing director (investment strategy), cautioned investors not to expect stock prices to continue rallying “sharply and unabated”.
But investors, he wrote, should stay invested. “Abundant liquidity on the sidelines and the possibility of Fed rate cuts should offer global stock and bond markets with support.”
BT in your inbox
Start and end each day with the latest news stories and analyses delivered straight to your inbox.
Tan Min Lan, Apac head of chief investment office, UBS Wealth Management, said: “We recommend investors look to buy the dip in opportunities backed by robust earnings growth, better pricing power, and structural drivers.
“Investors should also put cash to work before the Fed restarts its rate cuts and the hunt for yield becomes more challenging. We prefer attractive dividend-payers in markets like Singapore, Malaysia, and the Philippines… Valuations may look historically expensive from a spread perspective, but we think a decline in above-average yields will result in decent returns.”
Amid disturbing headlines, staying the course is challenging, but attempting to time one’s entry and exit in markets risks greater downside.
SEE ALSO
DBS chief investment officer Hou Wey Fook, in the bank’s latest CIO Insights, invoked the adage “time in the market beats timing the market”.
He wrote: “Trying to exit and re-enter at a more favourable level is easier said than done. Behavioural biases – particularly ‘anchoring’, which deters investors from buying back into the market at prices higher than their exit point – remains a perennial challenge.”
Sticking to a strategic asset allocation; investing regularly rather than timing the markets; diversifying and eschewing leverage – all these elements help investors to harness the power of compounding. Diversification, in particular, ensures investors benefit from the market’s tendency to rise over the long term – regardless of where interest rates are – and helps to cushion the downside.
In this edition of Who’s Who in Private Banking, wealth management heads of business and investments agree on some key trends: Artificial intelligence retains its promise as the structural growth engine of the future, and opportunities are wide-ranging, from infrastructure and semiconductors to applications. Despite the prevailing narrative of the end of US exceptionalism, there is for now no substitute for the US dollar.
Most of all, traditional stocks and bonds may not be enough to keep a portfolio on an even keel. Gold remains a favoured asset, but to build a robust and resilient portfolio, the addition of private and alternative assets can help enhance diversification and overall returns.
Copyright SPH Media. All rights reserved.
