Uncertainty, it seems, is our new normal.
U.S. President Donald Trump’s Covid-19 diagnosis has made an already messy election year even more chaotic, the U.K. and Europe are at risk of further lockdowns as coronavirus cases increase, and Brexit talks are still up in the air. In Asia, tensions are simmering between pro-democracy activists and the local government in Hong Kong while India’s underfunded health-care system is facing a growing challenge to control the virus outbreak.
Finding compelling reasons to invest when faced with so many unknowns is a daunting challenge — but one that our quarterly panel of veteran investors lives with every day. These money managers now see opportunities that stretch from cyclical stocks — which benefit when the economy runs hot — to battered European banks and the sovereign debt of China.
Before investing, build an emergency savings fund to see you through six months of expenses, if possible. If you’ve accomplished that already and can tick off the other suggestions in “The 7 Habits of Highly Effective Investors,” then you’re probably on solid financial ground.
For those who want to invest in the panelists’ themes using exchange-traded funds, Bloomberg Intelligence ETF analyst Eric Balchunas suggests ETFs that can serve as good proxies.
Buy European Banks
Some of the global equity market’s worst performers for the year are bank stocks, especially in Europe. The largest, best-managed European lenders trade at record low valuations — yet their balance sheets are strong enough to absorb all but the most draconian of economic outcomes.
Investors have abandoned these stocks, in part because the banks have suspended dividends and share buybacks during the pandemic at the request of regulators — yet many of the companies are likely to again pay dividends next year. That resumption, along with a revival in buybacks, should reward shareholders for their patience.
European regulators are finally facilitating mergers between banks and encouraging them to become more profitable through consolidation. In September, two large Spanish banks announced they will combine to form the country’s largest lender.
What’s more, bank stocks can outperform even when interest rates are low. Between 2009 and 2015 — a period of particularly low rates in the U.S. — shares of U.S. lenders outperformed the S&P 500 index by more than 55%.
The average European bank trades at a miserly 40% of tangible book value. With a potential economic recovery, they should trade at 80% — that would mean a doubling in the share price, with room still for further increases.
Look Abroad
Volatility has become a staple of 2020, and wild swings are unnerving — but that’s not necessarily a bad thing.
This year has tested investor resolve like rarely before. Fear and uncertainty associated with the pandemic sent investors fleeing everything from tech stocks to municipal bonds, and the quickest bear market decline in history was followed by the fastest rally on record early in the year.
Whether you are looking to diversify or for new avenues of growth, international stocks are the answer. The prospect of accelerating growth over the long term, increasing productivity, and growing standards of living support a thesis that the world’s strongest advance will come outside U.S. borders.
A weakening U.S. dollar also gives life to foreign stocks. Research shows that in the years when the American currency is relatively weak, shares abroad go up 85% of the time.
Broadly, the iShares MSCI Emerging Markets ETF (EEM) tracks over 800 large- and mid-sized companies in China, Taiwan, Korea, India and more. We recommend going a step further and focusing on exposure to Taiwan via iShares MSCI Taiwan ETF (EWT) and India via WisdomTree Indian Earnings Fund (EPI). These two countries offer terrific demographics and the ETFs participate in ample exposure to technology companies. Strong growth and favorable industry exposure combine for promising opportunities for investors.
