Investors have taken on too much portfolio risk in a rate environment that has distorted stock values and decreased bond yields at a time when market volatility is expected to continue, according to a recent study by Natixis Investment Managers. Market forces that drove stocks to record highs in 2021 are now calling for changes with […]
Investors have taken on too much portfolio risk in a rate environment that has distorted stock values and decreased bond yields at a time when market volatility is expected to continue, according to a recent study by Natixis Investment Managers.
Market forces that drove stocks to record highs in 2021 are now calling for changes with a looming interest-rate hike and efforts to normalize markets, the report noted.
Of those surveyed, 71 percent think the stock market has grown at a rate that isn’t sustainable. The benchmark S&P 500 index more than doubled in price from the March 2020 lows at the start of the pandemic to the end of 2021.
The top portfolio risk concerns for investors these days are inflation, interest rates, volatility, and valuations.
What does that mean for investors? It’s a good time to evaluate one’s portfolio and make sure it’s positioned to handle the volatility, says Vicki Brackens, president and financial planner at Brackens Financial Solutions Network, LLC in Syracuse, and a registered representative with LPL Financial.
To position portfolios for the changing landscape, fund selectors surveyed think big tech will continue to grow. They recommend shifts to more economically sensitive and value-oriented sectors such as financial, energy, health care, consumer discretionary, and information technology.
Many investors believe they are diversified when they have invested in several different companies that operate within the same industry, Brackens says. “They have variety,” she notes. “They don’t have diversification.”
That becomes a problem if the area you are heavily invested in experiences corrections in pricing. According to Natixis, since the beginning of the year, the stock market, tech sector, and cryptocurrencies have seen corrections.
Many of these corrections are the result of the influx of government subsidies at the beginning of the pandemic, Brackens says. “Monetary policy and subsidies created more cash in the system. As a result, asset prices increased to much higher levels,” she says. “The subsidies were good for individuals and their personal needs and also good for stabilizing the economy in the time of crisis, but this excess cash also helped inflate asset prices.”
All that cash sloshing around in the economy caused increased valuations in some areas that just aren’t sustainable over the long term, she notes. “There’s an imbalance,” Brackens says, adding that the pendulum always swings back.
According to the Natixis survey, 68 percent of investment professionals queried say that more frequent fund rebalancing is important as the markets ebb and flow. Brackens agrees that this is a good move. “I strongly suggest rebalancing,” she says, suggesting making tactical changes that reflect the current market as well as an investor’s individual goals and strategy.
The survey noted 84 percent of fund selectors plan to expand their model-portfolio offerings, something that streamlines the investing process and gives clients a more consistent investment experience.
In general, fund selectors surveyed are confident the economy will remain resilient but do predict that supply-chain disruptions will remain the biggest potential threat to the economy. Of those surveyed, 62 percent expect supply-chain issues to continue until 2023.
The supply-chain issue comes into play as investors are deciding what companies to invest in, Brackens says. Ultimately, what drives stock prices are profits and the future profit outlook.
The automobile industry is a prime example of supply-chain disruption, Brackens notes. “There are no chips to make new cars,” she says. Not only does this make used cars a hot commodity, but it also impacts the profitability of auto manufacturers. With profits down, those companies might not look like a good investment now, but investors need to look at the big picture and all the factors before deciding.
It could, in fact, be a window of opportunity, Brackens says, adding her recommendation that investors find a professional they can trust and work with to structure and develop a long-term investing plan.
The Natixis Investment Managers’ Global Survey of Fund Selectors was conducted by CoreData Research in November and December 2021. The survey included 436 respondents in 25 countries across North America, Latin America, the United Kingdom, Europe, Asia, and the Middle East.
The complete report is available online at www.im.natixis.com/us/research/2022-fund-selector-outlook