Stock markets have made a solid start to 2023 after last year’s meltdown, but the next bull market lies tantalisingly out of reach.
Inflation still remains a major threat, forcing central banks to continue raising interest rates and delaying the long-awaited policy “pivot” by the US Federal Reserve.
The summer is often a slower period for markets but it can also be an opportunity to get in early before prices rally in the final months of the year, as seems to happen more often than not.
US Federal Reserve raises interest rates for tenth consecutive time
If you are looking to invest $10,000 (Dh36,725) over the next quarter, here are three top investment trends to consider right now.
The first gives you exposure to the biggest and, in many cases, best companies in the world, the second is a play on the tech breakthrough everybody’s talking about, while the third takes aim at a beaten-down sector with big comeback potential.
As with any investment, always consider both the risks and rewards and aim to hold for a period of years, not just three months, to give your choices time to deliver on their many promises.
Global large-cap stocks
Wall Street suffered its worst performance since 2008 last year, with the S&P 500 large-cap index crashing 19.4 per cent to end 2022 at 3,839.50.
This year has been better, though, with the index up about 10 per cent so far to 4,198.08 at the time of writing.
Jay Hatfield, chief executive and fund manager at Infrastructure Capital Advisors, is now anticipating a summer rally.
“We remain bullish in the second half of the year and are maintaining our 4,500 target on the S&P.”
Investors are pouring money into “breakthrough technology” such as artificial intelligence (AI), which should support growth, while inflation peaked last year and should continue to retreat.
Recession fears have been overdone, energy prices are falling and threats of a stand-off over the US debt ceiling appear to have receded.
While the US banking crisis remains a concern, Mr Hatfield suggests looking for opportunities in large-cap companies that pay dividends in the second half of 2023.
For most, the best way to invest in US large-cap stocks is via a low-cost exchange-traded fund (ETF), which passively tracks the index.
Popular funds include the Vanguard S&P 500 ETF, SPDR S&P 500 ETF Trust or the iShares Core S&P 500 ETF.
Jason Hollands, managing director of investment platform Bestinvest, says UK large caps also offer good value.
While the S&P 500 is currently valued at 18.78 times forward earnings, London’s FTSE 100 is far cheaper, trading at roughly 10.5 times, Mr Hollands says.
“That is well below the longer-term trend and a discount of more than 30 per cent to global equities, the widest level in decades. UK blue-chips also offer an attractive dividend yield of more than 4 per cent, which is a healthy premium to government bonds,” he adds.
While the UK economy faces plenty of challenges with inflation proving sticky, it is expected to avoid recession this year.
“FTSE 100 companies generate almost 80 per cent of their earnings outside the UK, so should not be thought of as a narrow play on the domestic economy,” Mr Hollands says.
It suits today’s uncertain times, with high exposure to defensive sectors such as consumer staples and health care, he adds.
For most investors, a simple tracker such as the iShares Core FTSE 100 UCITS ETF should suffice here.
Artificial intelligence
Everybody is talking about AI and while some fear it threatens humanity, it offers an exciting investment opportunity in the interim.
US tech company Nvidia is leading the rush to monetise generative AI models such as ChatGPT, says Derren Nathan, head of equity research at Hargreaves Lansdown, and its shares are up a staggering 121.29 per cent so far this year.
Yet, Mr Nathan warns investors to keep a cool head and a close eye on the bottom line.
Nvidia reports first-quarter revenue on Wednesday and is forecast to drop 21.4 per cent to $6.5 billion, with operating profits down 35.6 per cent.
“That leaves a lot of work to meet current full-year estimates of double-digit revenue growth,” he says.
UAE minister calls for global coalition to regulate artificial intelligence
Other companies investing heavily in AI include Taiwan Semiconductor Manufacturing, Meta Platforms, Amazon, Microsoft and Google-owner Alphabet.
Vijay Valecha, chief investment officer at Century Financial, suggests most investors should spread their exposure to AI and highlights the Global X Robotics & Artificial Intelligence ETF.
This invests in an index of companies that seem likely to benefit from increased automation and AI adoption, and has grown a solid, although not spectacular, 14.6 per cent year to date.
However, the ETF is risky as its top-10 holdings make up two thirds of the fund and are expensive, with an average price-to-earnings ratio of about 34.2.
Like any breakthrough technology, the opportunities are huge but so are the risks. Only invest as part of a diversified portfolio.
Mr Valecha says investors could choose to play it safe with Big Tech, such as trillion-dollar companies Apple and Microsoft.
They’ve enjoyed a hugely successful year, rising 39.96 per cent and 32.95 per cent, respectively, year to date.
Recent tech earnings indicate the worst may be behind us, Mr Valecha says.
“Investors are better off sticking to the most popular growth names with sound balance sheets and well-diversified global revenue streams, including Google-owner Alphabet, Amazon and Facebook-owner Meta Platforms.”
Asia and emerging markets
At the start of the year, analysts including Lisa Shalett, chief investment officer of wealth management at Morgan Stanley, were tipping “beaten-down” emerging market economies to make a comeback.
China’s post-Covid reopening and pro-growth policies, a peak in dollar strength and new US trading relationships with India, Latin America and smaller Asian countries should lead the long-awaited fightback, Ms Shalett said at the time.
So far, the growth has been slow to come through, with the MSCI Emerging Markets Index up a mere 2.78 per cent by the end of April, but there are good reasons why this should soon change, Mr Hollands says.
“Emerging market equities are cheap today, trading at their steepest discount to developed market equities this century,” he adds.
For years, they were more expensive as investors were willing to pay a higher price for their superior economic growth rates.
“With so much negativity priced in, there is a real opportunity in Asia and emerging markets right now,” Mr Hollands says.
The weaker dollar will ease financial pressure on emerging market countries and corporates that borrowed in the greenback, while inflation is less of a threat in Asia than in the West, he adds.
Vanguard FTSE Emerging Markets ETF, iShares Core MSCI Emerging Markets ETF and Lyxor MSCI Emerging Markets Ex China UCITS ETF are options here.
