There is currently a situation where, in most cases, both the stock and bond markets have experienced a steep decline. For example, the Standard & Poor’s 500 index of the 500 largest companies in the US stock market was 6% lower on November 10 than it was three months earlier. True, the situation was much more dire in the middle of the week, because on the mentioned date alone this Wall Street general market index increased by 5.47%.
Investors on this side of the Atlantic are also not doing particularly well. For example, the German stock market index DAX fell 3.2% during the aforementioned time period. On the other hand, if we look at this year as a whole, the drop in index values would be much more impressive, with the US index losing 16.8% and the German market barometer falling 10.9 %. But there are also exceptions that allow investors to profit in these difficult times.
When asked if there has been growth in the geography and segments of the stock market over the past three months, Taras Buka, head of investment department at Luminor, says yes. For example, among global stock market regions, Latin American stocks rose 10.6% in euro terms. Looking instead at global stock market sectors, the financial markets expert indicates that shares in the energy sector increased by 14.6%, those in the healthcare sector by 1.4% and those in the financial sector by 1.1 %.
The good times outlast the bad
When asked what the possibilities would be for a relatively small investor willing to invest 1,000 euros with a time horizon of five years, T. Buka makes some considerations. He explains that market dynamics usually consist of relatively long periods of rising prices (“bull” markets) and shorter but sharper periods of decline (“bear” markets). When investing over a long period of time, such as five years, the allocation between risky and less risky financial instruments largely depends on the age of the investor and the level of risk tolerance. “The more important it is to preserve the initial value of the investment, the more significant part of the investment portfolio should be invested in less risky instruments,” emphasizes the Luminor expert.
An additional consideration, he says, is investment timing: When you invest when the market has already experienced a downturn, it increases the likelihood that asset values will recover within five years and provide a positive return. The main asset classes – both stocks and bonds, in connection with the previous decline in prices, look more attractive for long-term investments now than at the beginning of the year. In addition to what the expert said about long-term investments, it should be added that, for example, in the stock markets of Wall Street and Western Europe, each bullish cycle allows the values of the indices to reach new all-time highs. Thus, what was lost during the crisis is recovered with a breakthrough. For example, on Thursday the value of the US stock market index “Standard & Poor’s 500”, despite the decline experienced in recent months, was 151% higher than the high point before the previous financial crisis of October 11, 2007. However , compared to the low point in March 2009, the value of this index has increased by 493%.
Investing in securities – a long-term opportunity
The above indicates that long-term investing is not just profitable, but profitable, but since no one knows at what moment the market will rise or fall, it is worth investing gradually, without “shooting all the dust” at once. T. Buka says that reaching the bottom after a correction in the financial markets is very difficult: only in retrospect will we be able to determine exactly when the market has reached its bottom.
“The main factors currently significantly influencing market dynamics are central bank monetary policy and inflation data. If the investor wants to wait for the situation to resolve, he should closely monitor central bank monetary policy decisions and inflation data.For a non-professional investor, it is often a better solution to make periodic investments, thus reducing the importance of the moment of investment and relying instead on the average market return”, concludes the investment expert. He adds that long-term periodic investing allows for average market returns and historical data shows that these returns outpace inflation over the medium to long term.
It is better to spread the investment over time
Commenting on the situation, Andrejs Martinov, head of “INVL Pensiju Fondi”, expresses the opinion that, in general, market volatility will remain in the coming months and there is a possibility of both loss and profit.
“Therefore, if I needed to invest 1,000 euros, and if this is not the last money, then I would divide it into three parts and make a gradual investment, and precisely at the moments when market prices fall. Most likely, a part would be invested in November, then after New Year’s and then again in the spring,” A. Martinov explains the possible strategy. True, he would practice such a strategy provided that the situation does not really begin to develop according to the negative scenario. That is to say, if the savings of entrepreneurs and households in banks do not decline rapidly, which currently help to cover both the rapid increase in the cost of living and the increase in interest rates on loans.The expert explains that if a such a negative turn, citizens and entrepreneurs would be faced with problems in servicing their debts and would start to go bankrupt, while banks would be forced to sell their portfolios of securities, and therefore the prices of financial instruments would drop rapidly.
As for where to invest, A. Martinovs would not look for specific stock sectors, but would invest in an investment fund whose value changes according to changes in the value of a “broad” stock index, such as the “Standard & Poor’s 500 “. In this case, if the market index rises, the value of the units of the respective investment fund also rises. This type of investment can be offered by any universal bank in Latvia.
It is important that central banks do not overdo it by raising rates
Both financial market experts point out that the potential development of the market will largely be dictated by central banks. In the financial market, it is believed that central bank activity will soon subside and that future rate hikes will not happen or will not be as rapid as before. According to A. Martinov, continuing to raise rates, the depth of the economic recession may increase, which is likely to lead to a banking crisis and even greater downsides. “These concerns do not allow financial markets to recover faster and put them under pressure. At present, many stock market investors have been hoarding free funds waiting for “signals” to return to the market, and such signals are found from time to time, you invest money and prices go up a little more”, explains the expert.
Continuing on the potentially most successful segments of the stock market, A. Martinovs expresses the opinion that energy and food production is currently looking better than other market segments. We feel on our skin how the prices of fuels, food and energy resources change. Naturally, this provides extra profits for companies in this industry. But it should be noted that stock markets react very quickly to good or bad news, and it is clear that these successes have already been priced in and the stock price has already gone up. If there is confidence that the national economy will be able to sustain these high costs for a long time, without significantly reducing consumption, then producers’ revenues will continue to rise and share prices will follow, concludes A. Martinovs.
