Where To Invest This Quarter, Part 2

Where To Invest This Quarter, Part 2

over 3 years ago2 mins

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Investment professionals’ seasonal suggestions advocate adding undervalued bank stocks to portfolios – along with high-quality companies in several other “cyclical” sectors 🚴‍♂️

What does this mean?

Followers of Finimize’s Premium Insights will recall recent articles focusing on investors’ lack of love for bank stocks on both sides of the Atlantic. And the professionals called upon by data giant Bloomberg to contribute their top investment picks for the coming quarter are inclined to agree.

According to Causeway Capital Management, big European banks’ stock valuations look particularly low – belying their strong financial positions. Economic recovery could lead to some share prices doubling, with a long-anticipated spate of merger activity likely encouraging greater profitability in future.

Suspended dividends and share buybacks should eventually resume, rewarding forward-thinking investors – and the same is true in the US. Indeed, Causeway points out that American banks outperformed the S&P 500 stock index by 55% between 2009 and 2015 – despite interest rates being similarly low to now.

The US KBW Bank Index outperformed the broader stock market last time interest rates were near zero
The US KBW Bank Index outperformed the broader stock market last time interest rates were near zero

Expectations of a broadening economic bounceback have Absolute Strategy Research forecasting investors will move further away from dependable-in-a-downturn “defensive” shares and deeper into cyclical stocks, where earnings typically rise in line with economic growth. And a portfolio manager at investment giant BlackRock agrees – predicting their rising popularity could make cyclicals the next tech stocks… 👀

Why should I care?

For Finimizers looking to follow the professionals’ leads, investing a portion of your portfolio in relevant exchange-traded funds (ETFs) is the simplest and cheapest way to adjust course. If, like Causeway, you back European banks to go from trading at 40% of “book value” to 80% instead, then your best bet may be the iShares MSCI Europe Financials ETF: its top holdings include local giants HSBC and BNP Paribas.

As for those who think economic data will continue to exceed expectations, Blackrock recommends focusing on quality cyclical stocks and those set to benefit from long-term “secular” trends companies – rather than just those which look cheap. Semiconductors may represent one such sector, and the Invesco Dynamic Semiconductors ETF a matching investment approach. While not all chipmakers have had it easy recently, business looks to be buzzing up… ⚡️

The Dynamic Semiconductors ETF has seen strong long-term performance (Source: Invesco)
The Dynamic Semiconductors ETF has seen strong long-term performance (Source: Invesco)
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