If you have a spare $10,000 you want to invest, it’s a nice problem to have but a problem nonetheless.
Some investors may be concerned by the latest wave of falling share prices anxiety, as stock markets go through another bout of volatility.
While the safest strategy may be to simply stick it in a savings account, you will get negligible interest and the last 10 years have shown this has been a losing strategy. Here are three more exciting options to consider. While each is riskier than cash, it should be far more rewarding in the longer run.
Invest in Russia and China
Everybody loves a bargain, and investors are no exception. There is an advantage to buying stocks or investing in countries that are out of favour as you can pick up shares at bargain prices, then simply wait for the recovery.
You have to be careful, though, because there are often good reasons why a particular stock is cheap.
Right now, Russia is the cheapest market in the world, as measured by its price/earnings ratio, which takes the average price of all the stocks trading on its index and divides them by earnings.
The P/E is the most popular valuation measure and a result of 15 is thought to signify fair value.
Currently, Russia trades at just 5.9 times earnings, well under than half that. You won’t find a cheaper market.
Yet it has performed strongly lately, with the Russia MSCI index rising 15.17 per cent in the year to February 28 2019, compared to growth of just 5.88 per cent for emerging markets as a whole.
Gill Nott, chairman of investment fund JPMorgan Russian Securities, says Russia remains one of the cheapest major global stock markets and is tempting despite its troubled political relationship with the West. “For investors prepared to take the risk, it provides a good long-term investment opportunity,” adds Ms Nott.
You can also gain exposure to Russia through a low-cost exchange traded fund (ETF) such as iShares MSCI Russia UCITS ETF (CSRU) or HSBC MSCI Russia Capped UCITS ETF (HRUB).
Another emerging market giant, China, is also among the world’s cheapest trading at a P/E of 8.7 times earnings.
Luca Paolini, chief strategist at Swiss-based fund manager Pictet Asset Management, which has offices in Dubai, reckons both Russia and China are tempting. “Emerging markets are in a sweet spot right now with currencies the cheapest they’ve been in at least two decades relative to the US dollar.”
Yet investors have little exposure. “That’s despite a rally that leaves them up almost 10 per cent year to date.”
Mr Paolini says fundamentals for emerging economies are sound as they follow prudent fiscal and monetary policies. “China’s reflationary policies should boost exports and commodities. Chinese and Russian shares are particularly attractive.”
You can target the country through iShares MSCI China A UCITS ETF (CNYA) or iShares China Large Cap UCITS ETF.
Stuart McCulloch, market head for Middle East at tax, welfare and estate planning experts The Fry Group in the UAE, says China’s underlying economic growth rate of 5 to 6 per cent should help it to grow out of its problems. “At a near 10-year valuation low we expect Chinese equities to come back on to the radar of buyers in 2019. China is big and China will grow.”
Oliver Smith, portfolio manager at online trading platform IG Index, which has offices in Dubai, suggests spreading your risk across emerging markets by investing in ETF Vanguard FTSE Emerging Markets (VFEM). “This has a long record of being well managed,” he says.
Choose health care
Healthcare stocks are traditionally seen as a safe haven in turbulent times, as people continue to grow old and get ill even in a recession (and possibly more so).
The healthcare sector was last year’s best performer on the US S&P 500 and is up 11.37 per cent over the year to March 22.
Devesh Mamtani, head of investments and advisory (Financial Markets) at Century Financial in Dubai, says healthcare stocks confirmed their defensive capabilities by outperforming last year. “The US-China trade war and geopolitical tensions forced investors to reallocate capital and the fact that health care had cheap valuations also helped it rally.”
Underlying fundamentals are strong as the world’s ageing demographic drives demand. “Health care should continue to perform well as innovation is at an all-time high. New wonder drugs focused on cancer or Alzheimer’s or methods of treatment like gene therapy can revolutionise medicine.”
Mr Mamtani suggests low-cost ETF the Health Care Select Sector SPDR Fund (XLV:NYSE Arca) as an ideal way to gain broad exposure.
For those tempted by individual companies, Tom Anderson, senior investment manager at Killik, who has clients in Dubai, tips US-listed managed healthcare company UnitedHealth Group.
It is the largest healthcare company in the world by revenue, which topped $226 billion last year.
Mr Anderson said the group provides healthcare coverage and benefits in the US, and this business is balanced by its technology-focused arm Optum. UnitedHealth Group’s stock rose 18 per cent in the last year.
Mr McCulloch says traditional healthcare companies are turning to technology to drive growth and deliver medical advances but says: “Drug companies dependent on old product portfolios may find themselves under ever-increasing pressure from governments trying to rein in healthcare spending.”
Opt for smaller companies
Smaller companies are riskier than larger ones but also offer stronger growth prospects. Putting it crudely, it is easier for a company worth $500 million to double in value than one worth $500bn.
Over the 10 years to March 4 2019, North American Smaller Companies was the second-best performing investment sector of all with a total return of 407 per cent, with UK Smaller Companies in third place with 367 per cent.
Only the all-conquering telecom sector did better growing 442 per cent, according to figures from FE Analytics. European and Japanese smaller companies ranked fifth and sixth respectively.
Mr Mamtani says there is academic weight behind this as the ‘Three Factor Model’ designed by Nobel laureate Eugene Fama and researcher Kenneth French shows that small-cap stocks regularly outperform markets.
Nevertheless, you may endure bouts of sharp volatility and periodic underperformance, so Mr Mamtani says you should ideally look to invest for 15 years or longer. “This makes smaller companies ideal for younger investors with time on their side.”
Buying individual companies is risky, so it’s better to have a spread, Mr Mamtani adds: “Funds such as iShares MSCI EAFE Small-Cap ETF provide exposure to small public companies in Europe, Australia, Asia and the Far East, or the Vanguard Small-Cap ETF which focuses on US.”
Source: The National