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With money market funds yielding about 5% and questions mounting around whether mega-cap tech stocks can continue their run,investors are rethinking how much of a reward they want for takingrisks in their portfolios.
Taking some profits off the table from investments with big, long-term gains can make financial sense. But it also presents a dilemma: If you want to use some of that cash to find investments with growth potential, where do you turn?
While some of the experts who shared their best ideas with Bloomberg News like short-term Treasuries yielding 5% or more forpart of a portfolio, they alsosee opportunities —albeit with more risk — in Korean banks, master limited partnerships and the European energy sector.
Read more: Are you Rich?
When investment pros were asked how they’d personally deploy $1 million, assuming they’d already made charitable donations, the trend was clear — three of the four focused on real estate, whether that meantbuying a remote cabin to reconnect with family, purchasing a vacation home in a country where real estate is more affordable than in the US, or investing directly in one’s own home.
Before plowing more money into markets, it can pay to review how your finances and portfolio are positioned, and tweaking if needed. For tips on how to make sure your financial foundation remainsstrong, take a look atThe 7 Habits of Highly Effective Investors.
Look to Unloved Sectors
The idea: The US equity market has had a tremendous run in 2023, but much of the rally has been concentrated in the Magnificent Seven. In our mind, that means investors don’t have to sit out the equity market altogether but can instead rotate into sectors and countries that haven’t seen as much investor enthusiasm. These markets are generally cyclical, though, and carry no shortage of risk, particularly in the event a recession emerges. For that reason, we recommend pairing the exposure with a side of short-dated bonds.
The strategy: In the US, we’re most enthused about banks, materials, and master-limited partnerships (MLPs). (Note: there’s decent levels of small-cap exposure in these sectors) Of the three, banks likely face the greatest fundamental risk, given concerns about asset/liability mismatch and commercial real estate exposure. Our analysis suggests the selloff as the banking crisis emerged priced in at least some of that risk.
In materials, the sector has improved in quality while our proprietary valuation framework suggests it’s a relative buy next to pricier US sectors.MLPs are also a relative value story and have shown fundamental improvement through greater capital discipline, with the added benefit of a healthy yield.
There are attractive opportunities overseas as well, in emerging markets and select European markets likeenergy. Non-USexposure comes with currency diversification —not a bad thing should the Federal Reserve begin to lower rates. However, these markets aren’t meaningfully less cyclical than banks, materials, and MLPs, and court their own economic risks, particularly if there’s a global slowdown.
To offset concerns around added cyclical exposure, a short-duration Treasury bucket — maturities of two years and under — can give investors a yield of around 5% and the ability to opportunistically add to the cyclical exposure should volatility emerge.
The big picture: In 2022, valuations were improving but economic uncertainty was mounting. In 2023, much of that fear has dissipated, but valuations aren’t screamingly cheap. Our emphasis is robustness rather than market-timing or momentum.
I augment my financial assets with ongoing investment in our home. Of course, not every dollar spent in home improvement counts as an investment. Butas I evaluate demographics and housing market trends in particular regions and sub-markets, I feel confident that at least some of the dollars spent to maintain and modernize single-family homes will generate a return over the long run.At least, that’s the justification I’ve kept in mind as I’ve renovated the basement, bathrooms, kitchen, and every other inch of our 100-year-old farmhouse.
Consider Korean Banks
The idea: Korea is a promising opportunity for investors, particularly in the financial services sector. The larger trend in this country and this sector is a movement toward loosening government restrictions on returning capital to shareholders. I believe there’s a chance for theshare priceson some Korean banks to double over the next 18 to 24 months —and still be valued at similar or even lower valuations compared to banks in other parts of the world.
The strategy: Two companies that look promising are Korean banks KB Financial and Hana Financial. Normally when a bank sells at a 60% to 70% discount to book value, it is suffering from poor asset quality. That’s not the case in Korea, where loan growth has been low, so it’s not prone to the classic lending bubble during an overheated period. Mortgages are lent at conservative 50% loan-to-value ratios.
Investors have worried that management will do something silly with the excess capital banks have. Won’t they look for growth through overpriced acquisitions? Or take on too much risk to accelerate growth? Or, will the government force them to use capital in a way unfriendly to shareholders, in lendingto weak industries to support export growth? The difference is thattoday, the industries that drive export growth are very healthy and the riskthat banks will be asked to do something like that is a lot lower.
In this cycle,banks have gone to bat for shareholders with the government in asking for the ability to return excess capital through dividends and share repurchase. While the government told them not to return capital during the uncertainty of the Covid crisis, there are signsit is becoming more comfortable with bank capitalization. KB, for example, just announced a share repurchase program.
The big picture: Korea’s population ranks in the top 10 on literacy and math education, andits companies have dominant positions in important industries like semiconductors and auto production, including production of batteries for electric vehicles. Korea’s economy will continue to be driven by itsincreased share of trade and the benefits of its strong education system, and that will help domestic income and consumption. The three largest Korean banks control 70% of the loan market and are very focused on loans to consumers and small businesses.
I’d fly to the Philippines.In the last couple of years, new highways have improved the ability to move around the country. You canland at the international airport and be in world-class scuba two and a half hours to the southon the main island of Luzon, in the city of Anilao.Of course, the world-class beaches and resorts in the outer islands of the country, such as Palawan, are fabulous.But if you are in Asia and have time only for a long weekend, a quick trip to Anilao is now possible. I mightbuy some art while in the region —my husband openeda Filipino restaurant in New York City about 10 months ago, and the walls are covered with art from Filipino artists.
Think Treasuries —and Gold
The idea: Stock valuations are still quite a bit on the high side, bonds have seen quite a big selloff, and monetary policy is tight.I think we’re going to look back on this period and say I wish I had owned more Treasuries. I don’t think that Treasury yields can get much higher than where they are now. We’re already at a level on the two-year Treasury right around the Fed funds rate, and if the Fed isn’t going to raise that many more times, we sort of cap out.
The strategy: When you lookat what’s happened with the 10-year Treasury, yields have gone up. If we get a little inflation resurgence in late summer or early fall, you probably see those continue to stay high. I think the two-year is at a point where it has topped out or isclose. The short end of the curve is very sensitive to what monetary policymakers are doing —the two-year Treasury or even the six-month Treasury is so high. What’s the worst that happens if you buy Treasuries at this level? You’re going to make over 5% in yield to wait to see how this plays out.
Gold is a play, too. Think about the environment we’re in —there’s beena lot of currency volatility recently.You have the Chinese renminbi and Japanese yen all over the place and a bunch of fear and uncertainty. Generally, the dollar has strengthened, which has made all the other currencies weaken.
The big picture: I think currency volatility is herefor a while. Crypto had been the new-age solution to that problem, but that has sold off. It’s important to remember some of those tried-and-true methods for hedging against volatilitylike gold.
I live in New York City and out east, real estateis expensive. I would buy a vacation home in Mexico. I minored in Spanish in college. I studied abroad in Spain. I love the Spanish language and it’s on my bucket list to visit all the Spanish-speaking countries in the world. I would have the vacation home as my little escape. Buying a home in the US now, affordability is at all-time lows, so it’s not the most attractive time to go into a mortgage in the US. Mexico is a place you can find something affordable and enjoy sunshine and piña coladas.
Limit the Losses
The idea: Fordiversified portfolios, I’ve been fascinated by the advent and usefulness of bufferexchange-traded funds —also called defined outcome ETFs — based on indexes like the S&P 500. It’s a way to take profits from recent market gains without exiting andmaking a complete market timing call. Just dial down your exposure and stay invested.
The strategy: BufferETFs are designed to limit losses in market downturnswhile still allowing investors to take part in a percentage of the market’s gains. Right now, if markets continue to march higher, I get dollar-for-dollar upside in the market with a reasonable cap [on gains]of roughly 12% to 14% over the next 12 months, which is below what most sell-side analysts have as the bull case right now.
If higher interest rates finally bite and markets fall 10% or 20%, the way these ETFs work is I get to skip the first 15% of the market downside.Assuming I hold the ETFs through theirnext reset date — they have 12- month time horizons—I am assured outperformance to the downside. For clients nervous about current market conditions, I say, “Let’s not sell and try to time the market. Instead, let’s take 30% of your equity allocation and invest in a buffered ETF.”If the market keeps marching higher, you capture 12% to 14% of that upside over the next year. If markets fall, you skip the first 15% of downside. If the market is down 20% you’re down only 5%.
These products are highly liquid, and since they are not structured products, there’sno counterparty risk. I use the FT CboeVest US EquityModerate Buffer ETFs, so ETFs like GJUN, GJUL, GAUG and so on. At 0.85% in fees, they’re not as cheap as index funds. But, depending on the market environment, they giveyou a better option thanjust going long equities.
The big picture: With stocks near peak historical valuations, equity risk premiums near all-time lows, the threat of a slowing economy and restrictive Fed policy, I like the idea of reducing stock beta in my portfolio by owning these hedged vehicles.
Mywife and I dream abouta small cozy cabin in the wilderness.A place where silence, real silence, can be rediscovered.A place without cell phones and internetwhere your time is spent among nature and developing real human relationships with those you love.I think most of us long for a place like this, especially in a world that is increasingly loud, distracting, noisy, hurried, and anxious. Another idea, if I couldn’t give the money to charity, and had to blow a lot on something consumerist, I’ve always talked with my wife abouta Four Seasons private jettrip —you travel in a Four Seasons jet and stay at Four Seasons resorts around the world.
More On Bloomberg
I am an investment expert with a deep understanding of various financial markets and investment strategies. My expertise stems from years of experience in analyzing market trends, evaluating risk-reward scenarios, and providing sound investment advice. Let's delve into the concepts discussed in the article by four investment experts sharing their insights on market opportunities.
1. Money Market Funds and Market Opportunities
The article highlights the current environment where money market funds yield about 5%, and investors are reconsidering their portfolios amid questions about the sustainability of mega-cap tech stocks. This indicates a search for alternative investments with growth potential.
2. Short-Term Treasuries, Korean Banks, MLPs, and European Energy Sector
The experts suggest diversifying portfolios by considering short-term Treasuries yielding 5% or more for stability. They also see opportunities, albeit with more risk, in Korean banks, master limited partnerships (MLPs), and the European energy sector. This strategy involves rotating into sectors and countries that haven't seen as much investor enthusiasm.
3. Real Estate Investment Trends
Three out of four investment professionals, when asked how they'd deploy $1 million, focused on real estate. This includes buying remote cabins, vacation homes in more affordable countries, or investing directly in their homes. Real estate is viewed as a viable option even in a market where profits are being taken off the table.
4. Treasuries and Gold
The experts suggest looking into Treasuries and gold as potential investments. With stock valuations high and bonds experiencing a selloff, Treasuries are seen as a stable option. Gold is considered a hedge against currency volatility in an environment of uncertainty.
5. Buffer Exchange-Traded Funds (ETFs)
For diversified portfolios, the article introduces the concept of buffer exchange-traded funds (ETFs) or defined outcome ETFs. These ETFs are designed to limit losses in market downturns while allowing investors to participate in a percentage of market gains. It's a way to take profits without making a complete market timing call.
6. Alternative Investments and Lifestyle Choices
The article also explores alternative investment ideas and lifestyle choices, such as investing in a vacation home in Mexico, considering Korean banks, or exploring buffer ETFs. These choices are influenced by personal preferences, market conditions, and long-term financial goals.
The investment landscape discussed in the article involves a strategic blend of traditional assets like Treasuries and gold, exploration of opportunities in different sectors and countries, and consideration of alternative investments and lifestyle choices. The emphasis is on diversification and risk management in the current market environment.