- When allocating your money to offshore stocks, it is wise to orientate yourself on exchange traded funds (ETF) like the SP500 ETF for market returns.
- To achieve your goals, it is important to understand the stock market, its cycles, its rotations, its sectors and industries, individual stocks, and the economic environment in which stocks operate.
With inflation rapidly draining purchasing power, it is imperative to invest in a vehicle that generates returns above inflation. According to the Central Bank of Kenya, the Kenyan inflation rate is 5.73 percent. In the US, it is seven percent, its highest level since 1982.
When allocating your money to offshore stocks, it is wise to orientate yourself on exchange traded funds (ETF) like the SP500 ETF for market returns, or you can focus your allocation on a smaller group of companies.
However, to achieve your goals, it is important to understand the stock market, its cycles, its rotations, its sectors and industries, individual stocks, and the economic environment in which the stocks operate. This involves hours of research and studies.
The current economic environment in the US is characterized by unusually high inflation, a very low unemployment rate of 3.9 percent, an extremely low federal funds rate of 0.1-0.25 percent and a massive quantitative easing program of US $ 120 billion. Dollars each month, which has been reduced by $ 15 billion a month since December. This is a perfect recipe for stimulating economic growth.
The downside is inflation, which is causing high consumer prices and straining household budgets. To counter this threat, the US has promised to implement at least three rate hikes this year, with the first expected in March. Seasoned stock traders know that a rate hike will greatly benefit the banking sector.
It is very likely that bank stocks will perform well in these conditions, provided there are no more Covid-19 restrictions and economic activity will accelerate in 2022.
In 2021, West Texas Intermediate (WTI) oil and Brent oil both gained 55.5 percent and 50.5 percent, respectively. This resulted in similar performance for energy stocks in the US and Europe.
The growth was largely attributed to the relaxation of Covid-19 restrictions, the reopening of global economies, and an increase in economic activity that drove up oil demand.
This year the price of oil is expected to continue rising towards $ 100 a barrel as global demand continues to rise. This is already gaining momentum as investors shake Omicron’s fears off and bet that higher oil prices will send prices up more than four percent.
This, in turn, could increase revenue in the energy sector, providing alpha returns for the year.
This is a unique year starting with an inflation rate of seven percent. Companies will be forced to raise product prices and pass the cost of inflation on to consumers.
On the flip side, buyers can reduce spending on consumer discretionary and maintain the quality and quantity of purchases in the consumer staples sector. This means that people will still buy bread and milk, but it may be more difficult to buy new furniture or a new vehicle as inflation erodes their purchasing power.
As an investor, it makes sense to buy consumer goods stocks as these companies have the ability to raise prices while maintaining demand for their products. Any consumer goods stocks that have strong pricing power will be popular with investors looking to take advantage of this market characteristic.
Investors will also consider investing some of their money in luxury goods stocks. Luxury products are classified as Veblen goods (well-made, exclusive and status symbols) and their demand tends to increase with higher prices.
Since such products are considered a sign of wealth and status, they are seen as more attractive when prices rise accordingly, as they represent an even higher status.
Some luxury goods companies offer a limited amount of each product. So when they increase the price and demand increases, customers rush to buy more as the existing supply is reduced to a defined maximum supply. This means that during a period of inflation, the company can easily raise prices to generate additional income.
Over the past 22 years, technology stocks have shown strong growth even in difficult times. This is because they can easily scale their products while minimizing costs.
During this period, it has become difficult to separate technology stocks from growth stocks as they have outperformed overall market returns year on year.
This includes fast growing companies like Tesla, Google, Amazon, Netflix, Facebook, Twitter and Apple.
The best time to start investing was yesterday. The next best time is today.
Rufas is Research & Markets Analyst at Scope Markets Kenya