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Six Investing Veterans Pick Their Spots for 2019
January 14 2019 - Where to Invest $10,000 Right Now By Bloomberg
Investors can be forgiven for thinking that their mattress—or maybe a money-market fund—isn’t such a bad place to stash cash. Global trade tensions and White House turmoil helped fuel market jitters in the year’s final quarter, when the S&P 500 tumbled 14 percent from its September high. For the year, the index closed down 4.4 percent.
Retreating from a volatile market into cash, though, is a famously losing strategy. Investors who try to time the market often miss out on sharp gains that can follow down periods. Those who maintain a discipline in how they approach the markets, meanwhile, can pounce on promising stocks at lower valuations and potentially profit from others’ panic.
Those coolheaded investors are the type of experts who share their views with Bloomberg each quarter, and true to form, our six panelists—while some still sound defensive notes—see promising pockets of opportunity around the globe. These money managers see potential homes for a $10,000 windfall in industries as diverse as oil and European banks, as well as in battered-down areas ranging from the U.S. to emerging markets.
The recent market swings are a good reminder to start the year with a portfolio checkup. Are you diversified across different industries, asset classes and geographies? Do you have at least three months of expenses socked away in safe investments in an emergency fund? Take a look at “The Seven Habits of Highly Effective Investors” for ideas on how to make sure your portfolio enters 2019 in good shape.
Many of the ideas presented by our experts are at work in the mutual funds or investment portfolios they manage. Bloomberg Intelligence ETF analyst Eric Balchunas highlights exchange-traded funds (ETFs) as a rough way to invest around those ideas, and tallies up how his ETF plays performed last quarter.
Filtering out market noise is hard. That’s where our experts can help with solid investing ideas, along with well-reasoned reminders, such as that from panelist Joe Davis of Vanguard to simply “stay calm and carry on.”
Portfolio manager, BlackRock Global Allocation Fund
Head for the Oil Patch
Of the casualties in the 2018’s fourth-quarter carnage, energy stocks were some of the worst hit. Even after the recent rebound, the three-month rolling return for the U.S. energy sector as of Jan. 10 was -16 percent (excluding dividends), while the S&P 500 price return was -6 percent. The rout has left many of these stocks looking cheap, particularly considering the recent stabilization in crude oil prices.
As of the end of December, the S&P 500 energy sector was trading at a multiple of roughly 1.55 to book value (P/B). That’s the lowest since early 2016 and about on par with the trough valuation during the financial crisis. Valuations look even cheaper relative to the broader market. The current P/B represents nearly a 50 percent discount, the largest since at least 1995.
The sector also appears inexpensive compared with the price of oil. As you’d expect, the sector’s relative valuation tends to move (roughly) in tandem with crude prices. When oil prices are lower, the sector trades at a lower valuation compared with the market. Based on oil prices at $48 per barrel, history would suggest a 20 percent discount to the market, not a 50 percent one.
In addition to value, there are two other reasons to consider raising the allocation to energy shares. Historically, energy stocks have been more resilient than the broader market during periods of rising interest rates and/or inflation. If part of what has dislocated the market is the challenge of navigating higher interest rates, energy companies offer a reasonable hedge. Finally, large integrated energy companies are offering dividend yields north of 4 percent. In a yield-starved world, this looks attractive.
Way to play it with ETFs: The Energy Select Sector SPDR Fund (XLE) is most people’s go-to way to play energy stocks in the short-term, according to Balchunas. It has good liquidity and a low fee of 0.13 percent. However, the ETF is market cap-weighted, so Exxon Mobil and Chevron make up 40 percent of the portfolio. For those who want a more diversified play there’s the equal-weighted Invesco S&P 500 Equal Weight Energy ETF (RYE). It has a fee of 0.40 percent.
Performance of last quarter’s ETF plays: The ETFs that Bloomberg Intelligence ETF analyst Eric Balchunas highlighted as possible ways to play Koesterich’s theme of scooping up bargains in Asia—the iShares MSCI Japan ETF (EWJ), Franklin FTSE Japan ETF (FLJP) and JPMorgan BetaBuilders Japan ETF (BBJP)—all fell about 15 percent for the quarter.
Chief executive officer and fund manager, Causeway Capital Management
There’s a Price for Everything
By the close of 2018, global equity markets had punished—more like pulverized—stocks with economically cyclical earnings and typically rewarded those in the most defensive industries. The defensive havens included stocks in such industries as utilities, household and personal products, food and staples and retailing. In contrast, banks and insurance stocks, especially those in Europe, fell in price so sharply that their valuations have reached levels consistent with a severe recession and a financial system crisis.
That’s a value investor’s dream: to buy stocks whose valuations already discount an unlikely scenario, and then wait for the inevitable recovery. Even better, the most battered of European bank stocks pay investors to be patient via generous dividends.
Early this month, the MSCI Europe Banks Net Total Return USD Index traded at a multiple of eight times 2019 earnings and 0.7 times book value, and had a dividend yield of almost 6 percent. But these are not the same banks as during Europe’s last banking crisis. These companies have strengthened their capital positions to have four times as much capital as a decade ago. U.K. banks have enough capital, according to their regulator, to withstand an economic collapse, a huge rise in U.K. unemployment, a 33 percent drop in residential property prices and a 27 percent devaluation of the pound sterling. That’s akin to multiple shocks, and even after that nightmare, the banks would have twice the required capital.
Admittedly, banks are leveraged into economic conditions, good or bad. Adept bank managers (and there are plenty of these in Europe) know how to use their two primary levers to improve shareholder returns: cost control and capital management. With disciplined lending, ultra-cost efficiency and savvy technology spending, these well-capitalized banks should have a rosy future. At these bargain valuations, misery is already priced in.
Way to play it with ETFs: The closest thing to a play on European banks is the iShares MSCI Europe Financials ETF (EUFN), which is made up of 60 percent banks. The ETF has a fairly reasonable expense ratio of 0.48 percent. Since the ETF is market cap-weighted, big players such as HSBC Holdings and Banco Santander make up a big chunk of holdings.
Performance of last quarter’s ETF plays: The First Trust Morningstar Dividend Leaders Index Fund (FDL) fell 9 percent in 2018’s final quarter.
Global chief economist and head of investment strategy, Vanguard Group
Keep Calm and Carry On
The recent volatility in the U.S. stock market can make any investor uneasy. But changing your investment strategy in reaction to short-term market moves can backfire. In fact, typically when investors have a strong urge to make changes, the benefits of making that change are the weakest. For example, if an investor sold out of the S&P 500 at the end of 2008, over the past decade, they would have missed out on more than 300 percent in gains as of Dec. 31, 2018.
We know there’s no surefire way to protect investments from market swings. However, a diversified “all-weather” 60-40 portfolio split between stocks and bonds, while it won’t always deliver the best returns, can soften the blow of a market downturn and continue to deliver strong results over time. To ensure you’re maximizing your long-term returns, focus on factors you have control over—spending less, saving more and paying attention to your investment costs.
If you have strong convictions about how the economy and markets will perform in the next few years, does it make sense to change your portfolio in an effort to capitalize on those convictions? Maybe, but the trade-offs can be expensive.
We compared the returns of a 60-40 global stock and bond portfolio with two other portfolios, one optimized for a recession and one for a high-growth economy. (We characterize today’s economy as moderate growth). If you adopt a portfolio designed to benefit from recession, and the recession actually materializes, you’ll do better than the 60-40 portfolio.
But if there’s no recession? You’ll lose more than you would have gained if you’d made the correct economic call. The same trade-off is at work when positioning a portfolio for high economic growth—decent rewards if you’re right, higher costs if you’re wrong. Before making any decision, investors should have a firm understanding of their risk tolerance and the costs and benefits of these strategies.
During times of market volatility, it’s easy for investors to get distracted by the day to day and lose sight of their long-term plan. My advice? Ignore the headlines, keep calm and keep your focus on the long term.
Way to play it with ETFs: If the goal is a 60/40 portfolio split, a mutual fund may actually work best here, according to Balchunas. The Vanguard Balanced Index Fund (VBINX) invests in roughly a 60/40 allocation to plain vanilla equities and bonds. It is huge, at $36 billion, and cheap, with a 0.19 percent fee.
Performance of last quarter’s ETF plays: Balchunas highlighted the Vanguard Total Stock Market ETF (VTI), which fell about 15 percent in the quarter.
Portfolio manager, Artisan Global Opportunities Fund
Stick With Software
The current environment highlights the importance of a disciplined process aimed at finding compelling, high-quality franchises no matter the macro backdrop.
One secular trend we believe remains intact is the development and use of modern software tools to facilitate a more collaborative, efficient, mobile and secure work environment. Companies exposed to this trend are transforming how we work—in part by helping companies better benefit from the exponential growth in data over the past several years. Although many of these are (unsurprisingly) software companies, they have a variety of exposure to a range of industries—with notable examples focused on applications in life sciences and health care, financials, accounting, travel and others.
We find these companies particularly attractive given their business models. Many cloud-based SaaS (software-as-a-service) companies, because they are subscription-oriented, generate high levels of reliable, recurring revenue. As customers collectively identify a “winning” software provider, those winners typically have a significant opportunity to create a near-monopoly. That develops from their industry expertise and sticky applications, which often become heavily embedded in customer workflows and business processes. The combination of these features gives us conviction that many of these high-quality franchises still have a meaningful runway ahead of them—regardless of the turn the macro direction takes in the near term.
Way to play it with ETFs: Balchunas suggests taking a look at the SPDR S&P Software & Services ETF (XSW). It weights stocks equally, which adds some volatility, but also expands the reach for investors looking to get into smaller nooks and crannies of the sector. The ETF’s fee is 0.35 percent. It’s not very liquid, so buying with a limit order is a good idea.
Performance of last quarter’s ETF plays: Bachunas’s pick as a way to play on Hamel’s theme last quarter, the ETFMG Prime Mobile Payments ETF (IPAY), fell nearly 19 percent.
Chief investment strategist, the Leuthold Group
Profit From Others’ Panic
As we begin the new year, financial market volatility and uncertainty reign.
Investor mindsets are strikingly different than a year ago. Entering 2018, investor optimism was surging as everyone anticipated that a pending tax cut ensured a spectacular stock market. Conversely, as we begin 2019, pessimism, recession fears and bear market calls are commonplace.
We suspect the U.S. economy is not yet headed for an imminent recession, leaving a viable path for one more bull market run. In the past year, the stock market has experienced a “revaluation miracle” as the price-earnings multiple on the S&P 500 has declined from its highest quintile to its lowest quintile. Consequently, should U.S. economic growth slow enough to pause inflation and interest-rate pressures—but not enough to tip the recovery into a recession—the stock market should be able to deliver profitable returns as valuations again improve.
Investors may be best served this year by taking advantage of others’ panic selling. Focus on adding international developed and emerging-market stocks, which are severely underowned and offer better relative valuations. Consider sectors that would benefit from a weaker U.S. dollar, which is poised to decline as U.S. economic growth slows, including the materials, energy and industrial sectors. Financial stocks were pounded last year, but they could do well this year as the Federal Reserve pauses and recession anxieties diminish.
Technology stocks also now likely represent an attractive opportunity. But we would avoid the popular FAANG names, which are struggling with specific issues. Finally, reduce exposure to the traditional defensive sectors, including real estate, utilities, consumer staples and pharma.
We certainly don’t know if the stock market has hit bottom and wouldn’t be surprised if the recent low is retested. However, last year was a good reminder that investing isn’t always about getting aggressive when the story is fabulous. Maybe this year will prove that sometimes it’s best to tilt more aggressively when it doesn’t feel so comfortable.
Way to play it with ETFs: The Vanguard Information Technology ETF (VGT) would work here as a low-cost way to invest in tech, while avoiding most of the FAANG names, according to Balchunas. While the ETF holds Apple, the rest of the FAANG gang is not represented. The $17 billion ETF has a fee of 0.10 percent.
Performance of last quarter’s ETF plays: Balchunas’s picks, the GraniteShares Gold Trust (BAR) and the SPDR Gold MiniShares Trust (GLDM), both rose 7.7 percent for the quarter.
Chief investment strategist, Absolute Strategy Research
Focus on Wealth Preservation
Our cautious approach to risk assets and our preference for U.S. Treasuries was well-rewarded last quarter. The question now: Is it safe to “buy the dip”?
The narrative behind our caution was straightforward. Higher U.S. interest rates and the Federal Reserve’s cutting the size of its balance sheet created a global liquidity shortage at a time when global growth was already slowing. This challenged the outlook for U.S. (and global) equities and made the more than 3 percent yield on Treasuries attractive.
The Fed decided to stay more focused on the tight domestic labor market instead of the weakening global economy and global financial markets. But increasingly, the markets have taken the view that the Fed will change course through 2019. As a result, Treasury yields and the U.S. dollar have started to fall.
This implicit easing in monetary conditions, combined with the S&P 500 moving into “oversold” territory in December, provides some scope for a short-term bounce in U.S. equities. Equity volatility should fall and encourage a recovery in risk assets such as emerging-market equities and technology. There might even be scope for U.S. banks to bounce if bond yields head back to 2.8 percent and oil prices firm up.
Actions speak louder than words, however, and until policy easing is more explicitly embraced by the Fed, the omens for the longer-term outlook for U.S. equities and risk assets more generally remain clouded.
Our models show an increased risk of U.S. recession in 2020, confirmed by credit yields starting to rise even as Treasury yields are falling. In China, where policy is being eased more explicitly, trade wars and tech wars continue to obscure the picture. And in the euro zone there are early signs of unemployment fears beginning to rise just as the European Central Bank finishes its quantitative-easing program. We also worry that several systemically important euro-zone financial institutions have fallen more than 40 percent through 2018.
Thus, for longer-term investors, or those for whom wealth preservation is key, we recommend maintaining a defensive bias. When U.S. new orders fall as they have recently, real yields tend to fall. This will help support precious metals, equity income, utilities and infrastructure stocks.
Way to play it with ETFs: Balchunas points to the iShares Global Infrastructure ETF (IGF). The ETF has 40 percent allocation to utilities and a 3.3 percent yield. It has a dose of emerging markets exposure, although its biggest allocation is the U.S., at 37 percent.
Performance of last quarter’s ETF plays: The ETF Balchunas chose as the best proxy for Ketterer’s views last quarter, the iShares U.S. Treasury Bond ETF (GOVT), rose 2.1 percent.
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