With the world on the brink of recession, now is a tough time for investors with money in their pocket.
Yet, it is often at times like this that the best opportunities arise for those who have strong nerves and a long-term focus.
We asked analysts to name three exciting ways to invest $10,000 over the next three months. The first is a classic defensive play, the second focuses on the strength of the US dollar and the third takes advantage of UK Prime Minister Boris Johnson’s political demise.
While all three options are designed to take advantage of short-term movements, most investors should be looking to keep their money invested for much longer than three months.
As prices skyrocket, consumers are cutting back on non-essential spending such as clothes, eating out, socialising, travel and entertainment.
Businesses supplying these goods and services are called “consumer discretionary” or “consumer cyclical” stocks — and they are suffering right now.
By contrast, sales of consumer staples such as food and beverages, tobacco and household cleaning and personal hygiene products are holding firm.
Blue-chip examples of these non-cyclical, defensive stocks include Coca-Cola, Procter & Gamble, L’Oreal, Unilever and Philip Morris International.
The consumer staples sector is a rare bright spot this year, says Vijay Valecha, chief investment officer at Dubai-based Century Financial.
“People still buy essential items regardless of the state of the economy, making this a safe haven amid tumultuous market situations,” Mr Valecha says.
Typically, consumer staples post steady profit margins, year after year, even when the going is tough. While they may underperform when investors are optimistic, they come into their own in days like these. “This makes a solid anchor for your portfolio.”
Another attraction is that companies in the sector typically offer relatively high dividend yields, which they should continue to make even through recessionary periods. “They might even raise shareholder payouts as they continue to post steady, moderate growth.”
Mr Valecha suggests spreading your risk by investing in an exchange-traded fund (ETF) that targets a spread of consumer staple stocks.
“Consumer Staples Select Sector SPDR Fund, Vanguard Consumer Staples ETF, iShares US Consumer Staples ETF, and iShares Global Consumer Staples ETF are all worth considering,” he says.
As global stock markets crash and higher-risk assets such as Bitcoin suffer a near-death spiral, it is time to play it safe, says Chaddy Kirbaj, vice director at Swissquote Bank.
“Markets look set to remain volatile throughout the second half of the year, until we see more evidence that inflation is under control. In light of this, we advise investors to build a resilient, defensive portfolio.”
Mr Kirbaj suggests investing in the healthcare sector as people continue to fall ill in an economic downturn, possibly even more than they do during more positive times.
Popular healthcare ETFs include Xtrackers MSCI World Health Care UCITS ETF and SPDR MSCI World Health Care UCITS.
Sell euros, buy dollars
The US dollar is the world's reserve currency and this year's number one investment safe haven, rising strongly while rival low-risk asset classes such as gold, bonds and cash struggle.
By contrast, the European single currency is in turmoil. It has been hit hard by Russia's war in Ukraine, as rocketing gas prices risk driving the eurozone into a recession.
Even eurozone powerhouse Germany is under pressure, suffering its first monthly trade deficit in three decades, Fawad Razaqzada, market analyst at Think Markets, says.
“The price of energy, food and parts used by German manufacturers have surged by more than 30 per cent compared to a year ago. Demand from abroad is weak as the economic outlook deteriorates.”
This has hammered the euro relative to the greenback. It has fallen by almost 15 per cent from $1.19 to $1.02 over the past year, its lowest level against the dollar since 2002. The drop isn’t over yet: it could soon hit parity, where one €1 buys $1.
There are growing fears that the eurozone will suffer a repeat of the 2011 crisis, as pressure grows on Germany to assume responsibility for southern European debt.
Investors should consider trading the US dollar against the euro, Sam North, personal finance expert at investing platform eToro, says. “I believe the two currencies are going to hit parity relatively soon and the euro could even fall below that.”
The US Federal Reserve has started increasing interest rates and there will be more to come, while the European Central Bank is much more cautious as it fears the impact of higher borrowing costs on indebted southern European states, in particular Italy.
Lower interest rates will further reduce demand for the euro.
“Things could come to a head sooner than people think, should Russia temporarily shut down the Nord Stream 1 pipeline,” Mr North says.
Private investors can play this trend by trading the EUR/USD currency pair, effectively selling euros to buy dollars. “Alternatively, they can invest in an ETF that tracks dollar movements, such as the Invesco DB US Dollar Index Bullish Fund,” Mr North adds.
However, the US dollar may not win against every currency. As recession fears grow, it could fade relative to two rival safe-haven currencies: the Japanese yen and Swiss franc, Mr Kirbaj says.
He advises investors to hedge their risk exposure. The Japanese yen is down 22 per cent against the greenback year-on-year, but the pendulum could soon swing the other way.
The Swiss franc is another currency hedge worth considering.
Prime Minister Boris Johnson has resigned and this could be an opportunity for the struggling UK to turn itself around
The FTSE 100 jumped 1.2 per cent and the pound rallied from two-year lows against the dollar on Thursday, the day that Mr Johnson resigned. However, the uncertainty looks set to continue as Conservative Party candidates battle to find a successor.
This creates the space for new Chancellor Nadhim Zahawi to bring forward a budget or fiscal statement, while simultaneously campaigning for the top job, Jason Hollands, managing director of investment platform Bestinvest, says.
Mr Johnson's Conservative Party critics were concerned about his “insatiable appetite for high spending and the rising tax burden”, he adds. “We may see the party return to its historic heartland as a low-tax party with a disciplined grip on spending.”
That could call a halt to a planned increase in corporation tax from 19 per cent to 25 per cent, which is due to come into force next April.
Mr Hollands says this would be welcome news for UK-listed companies and stock markets.
The FTSE 100 has performed relatively well in 2022 and that could continue.
It has fallen just 4.24 per cent year to date, a fraction of the 19.84 per cent fall on the US S&P 500.
“The FTSE 100 has a lot less exposure to worst-hit sectors such as tech, consumer discretionary and communications services, and much higher exposure to better performing parts of the market such as energy, consumer staples and health care,” Laith Khalaf, head of investment analysis at AJ Bell, says.
“Old economy” sectors like tobacco and defence sectors have helped, he adds.
“The FTSE 100 has also been boosted by the weak pound because companies listed on the index generate three quarters of their earnings overseas, which are worth more once converted back into sterling.”
Overseas investors could therefore benefit if the UK struggles, as its internationally focuses companies should hold relatively firm.
The UK is a risky play now, but with the seemingly chaotic Mr Johnson now departing, this could be a good time to invest at the point of maximum confusion.
Markets hate uncertainty and Mr Johnson’s departure should bring some much-needed stability, George Lagarias, chief economist at Mazars, says.
“However, the transition from unstable to stable will not happen overnight, with the prospect of another Conservative Party leadership contest and possibly a general election,” he adds.
“After that, inflation, the economic slowdown, central bank policies and Brexit are still on the table. The pound should fluctuate for the foreseeable future.”
This should throw up plenty of buying opportunities over the next three months.
Low-cost ETFs tracking the FTSE 100 such as iShares Core FTSE 100 UCITS ETF or Vanguard FTSE 100 UCITS ETF may be the best way to invest.