September once again lived up to its reputation as being the bumpiest month of the year for stock markets, with US markets falling almost 5 per cent on fears that interest rates will have to rise even higher.
Investors are approaching the final quarter of the year with some trepidation. Some will want to flee to safety, while others may prefer to embrace risk.
Anyone looking to invest, say, $10,000 (Dh36,725) over the final quarter of 2023 might consider the following three options.
The first could deliver an inflation-beating return with zero risk, the second prioritises dividend income over growth, while the third is a gamble that could pay off in the long run.
As with any investment, you must consider both the risks and rewards and aim to hold for a period of years, not just three months.
Fixed-rate savings bonds
Cash is king again thanks to rising interest rates and it could retain its throne in 2024 as investors now expect interest rates to stay “higher for longer”.
Interest rates on cash deposits are “exceptionally attractive, especially for conservative investors who prioritise safety and seek predictable returns”, says Damian Hitchen, chief executive of Saxo Bank Mena.
“Following recent central bank interest rate increases, some local banks are currently offering up to 6 per cent a year,” he says.
Savers haven’t seen rates like this for 15 years, but the downside is that the moment interest rates fall, today’s variable savings rates will fall with them.
Another option is to invest in a savings bond paying a fixed rate of interest for, say, three or five years, says Anna Bowes, founder of UK savings rate tracking service Savings Champion.
“This could allow savers to benefit from today’s high rates all the way through to 2028. As consumer price growth slides, they could soon get an inflation-beating rate, finally boosting the value of their money in real terms,” she adds.
In the long run, stock markets should deliver a higher total return than cash, but the balance of power has shifted for now.
Watch: US Federal Reserve chief warns of 'pain' in reducing inflation
US Federal Reserve chief warns of 'pain' in reducing inflation
FTSE 100 ultra high-yield dividend stocks
It’s not easy to beat today’s bond yields, but dividend-paying shares listed on London’s FTSE 100 can give them a good run for their money.
Investors who buy a simple exchange-traded fund (ETF) tracker such as the iShares Core UCITS ETF can get a yield of 3.8 per cent a year.
AJ Bell investment director Russ Mould says FTSE 100 companies offer “bumper cash returns” as many carry out regular share buybacks on top of dividends.
“The index is on track to return £122 billion [$149.5 billion] to investors via ordinary dividends, special dividends and buybacks in 2023. This should take the total cash yield from the FTSE 100 to 6 per cent, with any share price growth on top,” he adds.
Those brave enough to buy individual companies’ shares can get even higher dividend yields of between 6 per cent and almost 10 per cent, plus the potential for share buybacks and capital growth.
Many of the highest yield are in the financial services sector. For example, wealth manager M&G currently yields 9.97 per cent a year, while insurer and asset manager Legal & General Group is close behind with 8.73 per cent.
British American Tobacco (8.47 per cent), housebuilder Taylor Wimpey (8.17 per cent), insurer Aviva (7.94 per cent) and Rio Tinto (7.77 per cent) all offer healthy income streams.
Yields are calculated by dividing the dividend per share by the company’s share price, which means that when the stock falls, the yield automatically rises.
Ultra-high yields should, therefore, be approached with caution as they can be a sign of a company in trouble and the dividend could prove unsustainable, Mr Mould says.
“Double-digit yields make investors wary, given the shocking record of firms previously expected to generate such bumper returns, including Vodafone, Shell, Evraz, Persimmon and Centrica. All cut the dividend instead,” he adds.
Nothing can be taken for granted, especially if the shares crash or the world falls into recession, but Mr Mould says: “Today’s high yields no longer seem so outlandish now that interest rates – and therefore government bond yields – are rising.”
While the FTSE 100 has offered little growth in recent years, it weathered September reasonably well, rising almost 3 per cent as investors sought its defensive qualities.
High-yield dividend stocks offer one more advantage, says Victoria Scholar, head of investment at fund platform Interactive Investor.
“They can help the value of your portfolio keep one step ahead of inflation,” she adds.
For those who prefer funds, The City of London Investment Trust has increased its dividend payout for more than 50 consecutive years, and currently yields 5.08 per cent.
JP Morgan Claverhouse Investment Trust is also popular and yields 5.07 per cent.
Go contrarian
Stock and bond markets are highly volatile today, with sentiment shifting in a moment. For many, playing safe is the wisest response at uncertain times like these. Others take a different view.
So-called contrarian investors like to go against the crowd, investing in the asset classes that everybody is selling in the hope of picking up a bargain and holding on for the recovery.
Current volatility is throwing up contrarian opportunities, notably China, as the troubles afflicting property developer Evergrande Group risk spreading.
Nicholas Yeo, fund manager at the abrdn China Investment Company, says Beijing has announced a series of nationwide stimulus measures and “the support is likely to continue as the upcoming October national day holiday, typically a high-consumption period, offers an excellent opportunity to restore consumer confidence”.
Contrarians could get in ahead of any recovery by purchasing a low-cost ETF such as the iShares MSCI China A UCITS ETF, which has fallen 16.6 per cent over the past year.
Further falls in the S&P 500 may give investors who missed out on this year’s artificial intelligence (AI) boom a second chance.
While chipmaker Nvidia is up 200 per cent this year, it has fallen almost 12 per cent in the last month. It still looks expensive trading at around 100 times earnings, but a further dip could bring an opportunity.
Mr Hitchen at Saxo says AI-focused software, data storage, and corporate integration stocks present intriguing investment prospects.
“Some of these companies are household names, including Microsoft, Meta, Adobe, and Accenture. As AI continues to evolve and expand, taking positions in this sector may offer exciting opportunities for growth,” he reckons.
It takes a brave investor to buck the trend today, but sentiment could soon change, says Yves Bonzon, group chief investment officer at Swiss private bank Julius Baer.
“While many see rising interest rates as a sign of imminent peril, we prefer to see it as a sign of the renewed strength of Western economies. Normalised interest rates are excellent news and the market correction should soon come to an end,” he adds.
While October can be a bumpy month, it is also known as a “bear market killer”. Six out of the 17 bear markets since the Second World War ended in this month and Mr Bonzon expects a rally by the end of the year.
Those who invest before it happens rather than afterwards are best-placed to benefit. But they will need strong nerves after the September slide.
