Friday 15 December 2017

Where to invest as China spooks markets

With experts warning of more stock market crashes, invest your money carefully, writes Louise McBride

'Investors should prepare themselves for further stock market crashes over the next few months, experts are warning'
'Investors should prepare themselves for further stock market crashes over the next few months, experts are warning'
Louise McBride

Louise McBride

Investors should prepare themselves for further stock market crashes over the next few months, experts are warning.

This warning comes less than two weeks after a major stock market crash in China led to billions being wiped from stock markets across the world.

Yet it is an expected interest rate hike in the United States, rather than any volatility in China, which is the biggest risk to world stock markets today, according to Brian O'Reilly, head of global investment strategy at Davy.

The US central bank, the Federal Reserve, is expected to raise interest rates by the end of this year - though the rate hike could be as early as this month.

"Whenever the Fed raises rates, it is always quite a volatile time in stock markets," said Mr O'Reilly. "The China impact may have been the trigger for the latest equity market sell-off - however, the biggest risk [to world stock markets] is a US rate rise. We expect equity markets will remain volatile ahead of the first rate hike in the US - which we expect before the end of the year."

Investors should therefore steer clear of emerging market equities as well as the shares of companies in or heavily exposed to commodity-producing nations - such as Norway, Brazil, Russia and Australia, advised Mr O'Reilly. "When there's a rate rise, a lot of money from the markets of commodity-producing nations tends to gets pulled back into the US," said Mr O'Reilly.

Commodities took the brunt of the recent Chinese stock market collapse, according to Ian Quigley, director of investment strategy at Investec Wealth & Investment. "Broadly speaking, emerging markets have been underperforming the developed market for four years now," said Mr Quigley. "Where the most damage has been done is in the commodity markets. Mining stocks have been a bad place to be over the last few years."

The shares of mining companies, such as Rio Tinto, and energy companies like Shell and BP, should be avoided until there is evidence of stability in the Chinese economy, advised Bernard Swords, chief investment officer with Goodbody Stockbrokers.

Steer clear too of companies that are heavily in debt - and of bonds. "Companies that tend to get impacted most by rate hikes are those that are in debt," said Mr O'Reilly. "Bonds are not the place to be where there are rate hikes. We believe bond prices will fall when the Federal Reserve raises rates."

Fears of a slowdown in China's economy, the second-largest economy in the world, have prompted concerns that China's woes could drag down the world economy. So where should investors put their money amidst predictions of more volatility on world stock markets - and jitters about the health of the world economy?

Blue-chip shares

Even if world economic growth slows down, the shares of high-quality global companies will still be worth buying, according to Mr Quigley.

Such companies include the likes of Diageo, Unilever and Nestle.

"Certain parts of China have slowed down and that may have a negative impact on global economic growth," said Mr Quigley. "However, critically, we think there's enough momentum in the developed world to offset that. Our first port of call if there's a sell-off is to buy the best companies in the world - because those companies stand the test of time. The shares of good quality companies have got cheaper in the last few weeks."

Buying the shares of one company only is risky so consider buying into a reputable fund which invests in high-quality companies instead. This will allow you invest in the shares of a number of companies - and spread the risk. Such funds could include the Finsbury Growth & Income Trust fund and the Morgan Stanley Global Quality Fund.

Technology and financial stocks could also be a good bet, advised Mr O'Reilly.

"We'd consider technology a good long-term investment because of the ongoing success of smartphones - and the growth of social media," said Mr O'Reilly. "Technology companies tend to have a lot of cash and no debt - so they usually do well in a rate rise environment. Furthermore, the US economy is starting to recover which is good for tech companies. US banks tend to do well as interest rates rise."

The shares of blue-chip German multinationals could also do well going forward - but choose companies which have more exposure to European markets than Chinese ones, advised Mr O'Reilly.

"Fears of a global recession are overblown," said Mr O'Reilly. "We are seeing very strong growth in the US and we are seeing growth in Europe, such as in Germany and Spain."

Mr Swords also believes that good US and European shares are worth buying.

"China is a big deal if you're in Taiwan, but the linkage between the US and European stock markets and emerging markets is small," said Mr Swords. "Investors should increase their exposure to the developed market and go with consumer-oriented stocks rather than industrial ones. Industrial shares are tied up in international trade and so could be impacted by China."

Mr Swords recommends the shares of low-cost airlines such as Ryanair, international hotel chains, and food businesses like Glanbia and Kerry. "Investing in consumer services ETFs [exchanged traded funds - essentially, a basket of shares] could also be a good move," he added. "In the construction space, CRH and Kingspan could be worth investing in because they are more oriented towards the developed market."

Standard Life Investments is also recommending European shares to investors - along with Japanese ones.

"Both European and Japan have companies which are showing decent earnings growth - and which have a better willingness to give money back to shareholders," said Andrew Milligan, head of global strategy with Standard Life Investments. "The risks for both of these regions, however, is what happens in China, because exports do matter. If we continue to see weak growth in China, that's fine - but if we see a sharp recession in China, that's another question altogether."

Although many investment experts are urging caution on emerging markets, Mr Milligan believes "the time is probably right" to move back into such shares. "Valuations are getting better but you'd need China to turn around first - or for the EU and US economies to start growing very strongly. With commodity prices under pressure, it is still difficult for emerging market economies. They need some pull from the developed market."

Hedge & private equity funds

Alternative investments, such as long-short hedge funds and private equity funds, will generate the best returns over the next few years, according to Mr O'Reilly.

Long-short hedge funds take long positions in stocks that are expected to increase in value - and short positions in stocks that are expected to decrease in value. (Long positions are essentially stocks that are owned while short positions are stocks that are owed.) "Long-short hedge funds have done better than equities over the last few years," said Mr O'Reilly.

Private equity funds should be considered by those who can afford to invest their money for between five and 10 years - or more, according to Mr O'Reilly. Such funds include those managed by Warburg Pincus, Blackstone and the Carlyle Group. "Private equity funds will pick their time to invest in distressed assets," said Mr O'Reilly. "In this current low interest rate environment, we think that private equity managers are well-positioned to take advantage of attractive opportunities."

European interest rates have been at record lows for almost seven years, and some economists believe it could be several years before the European Central Bank (ECB) raises interest rates again. COMMERCIAL PROPERTY

Commercial property funds also usually do well when interest rates are low and so investing in European commercial property funds could be wise. "Commercial property, especially European property, is relatively immune to China," said Mr O'Reilly. IPUT and the Davy Irish Property Fund, which both invest in Irish commercial property, are two funds recommended by Mr O'Reilly.


Short-term investors (that is, those with a three-year horizon or less) can't afford to take risks with their money as they might need to cash in their investment just when a stock market crash collapses - which would see them lose much of their money. So for these, cash investments are their only option. This is particularly true if more market volatility is on the cards - which appears to be the case.

"Although the outlook for the world economy is not appalling, it's not great either," said Mr Milligan. "We don't think the stock market volatility is over yet."

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