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Trading in financial markets involves significant risk of loss which can exceed deposits and may not be suitable for all investors.
Before trading, please ensure that you fully understand the risks involved
Trading in financial markets involves significant risk of loss which can exceed deposits and may not be suitable for all investors. Before trading, please ensure that you fully understand the risks involved

Thursday, March 05, 2020

The National - Three ways to invest $10,000 in the next three months

By Century Financial in Century in News

The National - Three ways to invest $10,000 in...

On Wall Street, the benchmark S&P 500 index tumbled 2.8 per cent on Tuesday despite the US Federal Reserve’s surprise 0.5 per cent rate cut. It was the index’s eighth daily decline in nine days.

As the coronavirus strikes fear into global stock markets, investors who have a bit of cash at their disposal will be a little more nervous than usual. Some cautious investors may be tempted to avoid stocks and shares altogether, while others will be looking to snap up buying opportunities amid the chaos.

If you are looking to invest $10,000 (Dh36,725) over the next quarter, here are three options to consider. The first will keep your money out of harm’s way, the second will help you build a diversified portfolio and weather future stock market storms, while the third could prove a timely opportunity.

Play it safe with cash and gold

Cash is king, the old saying used to go, but it lost its crown after the financial crisis and hasn't got it back.

Savers can still expect a near-zero return today, but that may look more appealing after the stock market traumas of the last week, which saw indices such as the S&P 500 falling into official correction territory after dropping more than 10 per cent.

If you have the cash to hand, it allows you to pick up bargain stocks if markets panic and you decide stocks are oversold.

Russ Mould, investment director at online trading platform AJ Bell, says cash is a safe haven amid today’s jumpy markets, giving stability, "downside protection and peace of mind".

Share prices have risen steadily upwards for more than a decade, and a pullback was long overdue, Mr Mould says. “The deadly infection is having a big impact because markets were already bullish, complacent and even frothy.”

He quotes US billionaire investor Warren Buffett's famous mantra that investors need to "be fearful when others are greedy and greedy when others are fearful”. If the fear factor ratchets up a notch or two, brave investors with an eye on the long term may see this as an opportunity to get greedy.

“If you have the cash to hand, it allows you to pick up bargain stocks if markets panic and you decide stocks are oversold,” he says.

The drawback with leaving money in cash for the long term is that with returns of around 1 per cent, your money will barely keep pace with inflation and is likely to fall behind in real terms.

Cash looks even less attractive after the US Federal Reserve surprised markets by cutting 50 basis points off interest rates on Tuesday to offset the impact of the coronavirus on the economy and boost investor sentiment.

Even so, cash will still appeal to many in current conditions. “Risk-averse investors may prefer a guaranteed, real-terms loss, instead of a potential sharp double-digit drop in share prices,” Mr Mould says.

Gold is another safe haven and it has inevitably rallied, hitting a seven-year high of $1,640 per ounce in the immediate aftermath of the Fed rate cut. Gold-backed exchange-traded funds (ETFs) saw more inflows on Tuesday, with the total expanding to the most ever.

Vijay Valecha, chief investment officer at Century Financial, recommends the SPDR Gold ETF. “It has seen $2 billion of inflows this year as investors hedge themselves against any further downturn,” he says.

Another tip from Mr Valecha is the Van Eck Global Vectors Gold Miners Shares ETF, which is designed to track and deliver the combined performance of 47 large-cap global gold miners.

US government bonds are also a safe haven, and Mr Valecha suggests the iShares 7-10-year Treasury Bond ETF, which saw around $600 million worth of inflows last week.

At times like these, it can pay to have a diversified portfolio — one that has exposure to bonds, cash, property, gold and other asset classes — rather than only investing in more volatile stocks and shares. A simple way of doing this is to buy a multi-asset fund, which acts as a one-stop portfolio, covering a balanced spread of funds.

Joe McDonnell, head of portfolio solutions EMEA at investment management firm Neuberger Berman, says that while riskier assets such as shares have had a strong decade, future returns may be lower and more volatile. Multi-asset funds are more attractive in this environment, especially for investors needing income.

“Rather than select a single asset class, multi-asset funds seek to combine a number of income sources, including high-quality shares, high-yield bonds, emerging market debt, mortgage bonds, hybrid bonds, loans and real estate,” Mr McDonnell says.

By combining income target and managing downside risk, these funds should also generate plenty of capital growth, too, he adds.

Mr Valecha recommends the IQ Hedge Multi-Strategy Tracker ETF. “This is designed to provide risk-adjusted returns through a variety of means including long/short exposure to US equities, emerging market stocks and fixed-income bonds. It is well-diversified with holdings spread across more than 450 underlying instruments,” he says.

Some offshore fund platforms offer multi-strategy portfolios; for example, Internaxx Smart Portfolios offers investors globally diversified portfolios of stocks and bonds, which are regularly rebalanced in line with your original risk profile.

Stock market sectors have been hit across the board, particularly energy and travel companies, but Mr Valecha says the healthcare sector could act as a hedge against the market downturn.

Healthcare is a 'defensive' sector because it tends to hold up during recessions and it looks attractive given current concerns. “Health stocks could benefit as the coronavirus looks set to dominate headlines for the next couple of months,” Mr Valecha says.

Mr Valecha picks out a range of US healthcare stocks, including protective clothing and infection control specialist Alpha Pro Tech; biotechnology firms Gilead Sciences, Inovio Pharmaceuticals and Moderna; vaccine maker Novavax and cleaning products specialist The Clorox Company.

“Alpha Pro Tech's stock is up by an astonishing 517 per cent this year, due to high demand for its N-95 face mask. It has booked $14.1m in sales since late January and demand remains strong," says Mr Valecha.

Clorox, which makes cleaning products, supplies and disinfectants, is expected to see demand rise. As an added bonus, “it also has an impressive track record of boosting its dividend every year for more than 40 years”, Mr Valecha says.

Meanwhile, Gilead is launching a pair of late-stage trials to evaluate the antiviral medication remdesivir as a coronavirus treatment.

Just remember, buying individual company stocks is risky, particularly if they have recently shot up during a moment of market excitement like this one. For example, Alpha Pro Tech and Novavax both fell sharply on Monday as investors banked outsized profits following their dramatic price spikes.

Such stocks could crash further when the coronavirus scare eventually slips out of the headlines. As ever, when deciding where to put your money, you must look beyond the short-term coronavirus scare and make sure there is a strong long-term case as well.

Source: The National