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.
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.
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.
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