Three ways to invest $10,000 in the third quarter

Amid global inflation, war and recession fears, Bitcoin, bonds and Japanese equities could provide opportunities for investors

One must consider both the risks and rewards of investment and should aim to hold for a period of years, not just three months. Getty

The US may be in a bull market driven by the artificial intelligence revolution, but the first half of 2023 has been hard going as inflation, war and recession sink investor sentiment.

Now even the US tech resurgence looks fragile, as it has been built on just seven stocks – Apple, Microsoft, Amazon, Google, Nvidia, Meta and Tesla – while the rest of the S&P500 flounders.

If you are looking to invest $10,000 (Dh36,725) over the next quarter, it might be wiser to look elsewhere, so here are three rival trends to consider right now.

The first is controversial and volatile, but could still prove profitable for those happy to take the risk. The second is a more defensive option that could help investors take advantage of the forthcoming US Federal Reserve “pivot” when it finally stops increasing rates and starts cutting them instead.

The final option is to invest in the only other major stock market to match the US for gains this year, as it could have further to go.

As with any investment, you must consider both the risks and rewards and should aim to hold for a period of years, not just three months. These three opportunities may all pay off, but only if you give them time.

Bitcoin

Bitcoin divides investors like nothing else but few will deny that it has staying power.

After losing three quarters of its value when crashing to $16,606 in January from $67,000 in October 2021, it’s showing signs of life again.

Even a sceptic like Nobel-prize winning economist Paul Krugman has given up predicting its imminent demise, recently confessing: “There always seems to be a new crop of believers. Maybe just think of it as a cult that can survive indefinitely.”

The price is up 85 per cent year to date to $30,288 at the time of writing, triggering the usual outlandish claims that it’s on course to hit $500,000 or some other fanciful figure.

Bitcoin isn’t digital gold, as some claim. It’s too volatile for that. It’s perhaps best seen as a play on investor sentiment and the price has picked up as tech stocks surge and investors position themselves for the Fed pivot.

On those terms, should you invest in it?

Crypto investors have shrugged off the latest challenge from the US Securities and Exchange Commission, which is charging the two biggest crypto platforms Coinbase and Binance for various trading, oversight and registration offences, says Katharine Wooller, business unit director at Coincover.

“Bad news from a regulator is far from unusual and the US is only a small market for a truly global asset. With proper protection for digital assets and regulatory frameworks being established in a number of jurisdictions, reputable crypto is firmly in business-as-usual territory,” she adds.

Naturally, business as usual for Bitcoin will no doubt include its fair share of scams, platform collapses and intense volatility, but investors who can stomach all of that may find today’s entry price tempting. Just remember, you could lose all your money with no redress.

Bonds

Government and corporate bonds lie at the other end of the risk spectrum, and they’re having a moment too, says Tom Stevenson, investment director at Fidelity International.

“For the first time in years, investors are focused not on shares but fixed-income investments, including bonds,” he adds.

Bonds are issued by governments and companies (they’re known as corporate bonds) to raise money to cover their spending.

They pay a fixed rate of interest with the promise to return your capital at the end of the term, but prices crashed last year as interest rates soared and buyers demanded big discounts to buy older bonds paying next to nothing.

“That’s bad if you own the bond, but it can provide an opportunity for new investors to buy an investment with negligible risk at an attractive price,” Mr Stevenson says.

Investors could lock into today’s higher yields, on the assumption that rates will fall when the Fed pivots. That will drive up the price of existing bonds, reversing last year’s meltdown.

The stock market ruled for a decade but now bonds look enticing again, says Damian Hitchen, chief executive at Saxo Bank Middle East.

“Both US and UK government bonds currently yield between 5.50 per cent and 6 per cent a year, the highest since 2003,” he says.

He adds that investors often believe they need large sums to invest in bonds, but they can invest in a bond fund for as little as $1,000 on a trading platform.

“As investors seek to diversify and balance their portfolios, bonds once again are proving to be a valuable asset,” Mr Hitchen says.

There are scores of government and corporate bond exchange-traded funds (ETFs) to choose from, covering the US, Europe and emerging markets, with some offering inflation protection, too.

Popular names include the Vanguard Short-Term Inflation-Protected Securities ETF, JPMorgan International Bond Opportunities ETF, the Fidelity Total Bond ETF and the iShares TIPS Bond ETF, which offer broad exposure to inflation-protected US Treasury bonds.

This doesn’t mean investors should dump stocks and pile into bonds, but they may want to adjust their exposure.

Japanese equities

In January, we called Japan a “contrarian call” as the country’s stock market seemed poised to recover after decades in the doldrums, and that’s exactly what it’s done.

While central bankers in the US and Europe were tightening monetary policy, the Japanese authorities were doing the reverse, unleashing a market-friendly blend of fiscal expansion, monetary easing and corporate governance reforms.

As investors seek to diversify and balance their portfolios, bonds once again are proving to be a valuable asset

Damian Hitchen,
chief executive at Saxo Bank Middle East

It seems to be paying off, with the Nikkei 225 Index up 26.53 per cent so far this year to more than 33,000, lifting it to levels not seen since 1990.

“Along with the US, it’s this year’s stellar outperformer and the growth is coming from a much wider base,” says Vijay Valecha, chief investment officer at Century Financial.

The nation’s shares were given another lift by Warren Buffett, the world’s most famous investor, whose trip to Tokyo in April and enthusiasm for top Japanese companies like Itochu, Marubeni, Mitsubishi and Sumito have inspired fund managers to up their exposure, too.

“Mr Buffett has been tempted by historically low valuations compared to developed market counterparts, sizeable cash flow generation despite higher debt levels, and Japanese yen depreciation, which has boosted exports,” Mr Valecha says.

Hal Cook, senior investment analyst at Hargreaves Lansdown, says the Japanese stock market has suffered many false dawns and could face a short-term correction after strong recent gains, but the long-term looks promising.

“Unlike other developed markets, Japan has not been raising interest rates, so cash offers savers little protection against inflation. There is $7 trillion sitting in cash in Japan – if that flows towards the stock market, it will be a welcome accelerant,” Mr Cook adds.

Many investors have little exposure to this forgotten corner and may want to look for an entry point over the next two or three months.

Popular ETFs include iShares MSCI Japan, JP Morgan BetaBuilders Japan ETF and WisdomTree Japan Hedged Equity.