Managing your portfolio in the coming few years may prove to be a challenge as stock markets such as the S&P 500 and FTSE 100 have enjoyed close to ten years of steady growth. It is quite likely that a bear market situation could be around the corner following the prevalence of a long and significant bull market.
Investors may find themselves at a loss when it comes to discovering new avenues for investment as the possibility of a market slump hangs over their head. This can have a significant impact on the investor sentiment, at least over the medium term. However, it is possible for an investor to beat global indices by paying careful attention to the following three aspects over the coming years.
While applying this knowledge to your investment portfolio may be easier said than done, it is possible to turn the odds in your favour by focusing on a few key areas as given below.
Higher inflation is quite likely to take roots especially since a decade of low inflation has been experienced by most global economies. Putting it in simple terms, it is merely a part of the economic cycle. For quite some time, countries such as the USA and those in Europe have recorded high GDP growth rates and this can lead to an overheating of economies in a few years from now.
The spending levels in the USA have increased tremendously and this may affect the pace of inflation. A major tax cut is being implemented by President Trump along with an increase in government expenditure on defence and infrastructure. The combined effect of these policies can be an increase in consumer demand which can further elevate prices.
Also, as governments in the developed countries no longer create tough economic conditions to curb public expenditure, the possibility of inflation rising only seems more feasible.
In anticipation of such times it can be a wise move on the part of investors to purchase stocks in companies which are capable of transferring most of the higher cost inputs to consumers. As a result the appeal of those stocks which have a competitive advantage on costs and those that belong to companies having a strong brand loyalty is likely to increase.
Rise in Interest Rates
It is possible that the interest rates may continue to rise on account of higher inflation. You may have noticed that they have already begun to increase in the UK, USA and other developed economies. This trend may continue in the near future and as a consequence certain sectors may seem more attractive than the others.
As the net interest margins continue to rise investors may realise the potential for higher profitability bringing back bank investments into demand. However, there is a likelihood that stock prices may suffer due to the rise in interest rates. It is common knowledge that interest rates and equities share an inverse relationship which means that demand for stocks may get suppressed due to higher interest rates over the medium term.
As a result, stocks that provide stable earnings and constant dividends may seem more attractive. Also, companies with stronger business models which are able to withstand economic fluctuations may perform better due to a lack of strong capital growth in the wider index.
It is also advisable to safeguard your investments by writing a Will using a free online Will kit as it can protect your assets in the long term.
Certain companies may face financial challenges owing to higher interest rates. Over the last decade, the cost of servicing borrowings have been at an all time low, due to which debt has not been a deterrent in deciding which stocks must be bought. Profitability of many stocks across a range of sectors could suffer a blow due to higher interest rates. This can lead to a drop in valuations of such stocks and make them uncertain regarding the returns that they would generate.
For this reason it is advised that investors should carefully consider the interest cover and debt levels for companies whose stocks they are presently holding or contemplating to buy.
By taking the necessary precautions, it is possible to reduce risk and also avoid potential difficulties over the medium term as interest rates slowly begin to normalise.