For retail investors, ups and downs in the market can be scary. There have been plenty of them in recent months as China devalued its currency and the Federal Reserve continued with its near-zero interest rate policy. In August, the Standard & Poor’s volatility index (ticker: VIX) jumped to its highest point in four years, and it spent much of September on a wild ride.
Volatility can also provide opportunities for investors looking for bargains. Amid an uncertain outlook for the market and key influencers such as interest rates and China, it might be a good idea to take a page from “Dr. Strangelove” — or learn to stop worrying and love the volatility.
Financial experts recently discussed five themes with investors during a recent webcast hosted by Fidelity Investments. Investors would do well to remember them during a volatile market.
Get used to volatility. The market’s ups and downs are invoking memories of the volatile market of 2011. Melissa Francis of Fox Business Network says the “tremendous volatility” may be here for a while.
The growing popularity of exchange-traded funds is adding to the market volatility, she says. ETFs are a convenient entry point for many investors seeking to shift their holdings and try to beat the market in response to its ebb and flow. And, she notes that commercial banks are prohibited from running proprietary trading desks — a restriction imposed by the 2008 Volcker rule that was designed to keep banks from making speculative investments such as those that contributed to the financial crisis that year. That means banks can no longer stake big, speculative positions that served to smooth out the gyrations caused by algorithmic traders and quantitative hedge funds.
A lack of growth in the industrialized world is a long-term component of the volatility, says Andrew Serwer, editor-in-chief of Yahoo Finance.
But he adds that volatility can be advantageous, as it can become difficult to spot bargains in an uninterrupted bull market. Smart traders can make money in a volatile market as stocks go different directions, he says.
China ‘s slowing growth. China, which Serwer predicts will become the world’s biggest economy in his lifetime, is similar to “a maturing growth stock,” he says, and can be difficult for investors looking for a way to invest — especially when information is difficult to get out of the Asian nation.
Nelli Oster, global investment strategist with BlackRock Investment Institute, predicts that China will be the largest importer of industrial robotics by next year as it seeks to automate an economy where labor costs rose fourfold from 2002 to 2012.
What is certain is that China’s economy is transitioning, and people are moving from the countryside to the city, Serwer says. So China will want to control of all the commodities it needs, as evidenced by investment in Africa and Australia.
Beijing’s recent stock market turmoil, currency devaluation and a lack of innovation in its market has made investing in China more difficult, says Tim Seymour, co-founder and managing partner of Triogem Asset Management in New York. But overall, “China’s OK,” he says.
Interest rates. The Fed has kept its official interest rate near zero since December 2008 to support the U.S. economy following the global financial crisis. That appears to be nearing an end, however, as the Fed has indicated a willingness to begin raising rates late this year or in 2016.
Serwer doesn’t think the Fed will raise rates until 2016, and Oster agrees that rates will stay lower for longer. Both cite technological innovation as deflationary, and Oster says that makes it hard for the Fed to hit its 2 percent inflation target.
She adds that U.S. demographic trends are deflationary as well, and Serwer says Chinese demand trends are also deflationary. “I don’t disagree that we need to raise rates,” Serwer says. “But you don’t just do it because you’ve been waiting a long time.”
Technology stocks are still hot. Tech stocks are some of the most popular on Wall Street, and there are still bargains to be had, even among the big companies. Apple (AAPL) has a low price-to-earnings ratio, has a massive amount of cash and a lot of talent, Serwer says. “I don’t see how you don’t own it, especially because it’s cheap,” he says.
However, he cautions that Apple’s still-under-construction “spaceship” headquarters — the huge, circular building said to be a mile in circumference and covering 175 acres in Cupertino, California — could be a “jinx” or “hubris” for a company clearly at the top of the heap, with nowhere to go but down.
Serwer says there is a lot of investment room in social media, with still-private companies like Snapchat having enormous sway with millennials and increasingly being a delivery option for news.
As for Google (GOOG, GOOGL), Serwer says the tech behemoth is dominant in its sector, and the company is still innovative, and young people still want to work there. “I have faith in those people,” he says.
Big data and cloud storage are part of Google’s strategy, Francis says.
Gavin Baker, portfolio manager with Fidelity Investments, notes that Google has a lead in artificial intelligence, saying many of the top AI scientists in the world work there and that cloud computing is now making enough computing power available for AI to be viable. He gave the examples of Google’s self-driving car and Google’s app that can let people know they need to leave early for a restaurant reservation, depending on traffic conditions.
Renewable energy. Solar stocks offer interesting value now because they’ve been sold as oil prices decline, Seymour says.
He says there are interesting ideas in the solar space because of innovation and that stocks in the sector have gotten beaten up unnecessarily. Solar and wind energy are improving compared with natural gas and coal, and they are dramatically changing the energy landscape.
Baker, whose fund owns SolarCity (SCTY) and Tesla Motors (TSLA), notes that solar cells are getting 8 percent to 10 percent more efficient at converting sunlight to energy each year, doubling efficiency every seven years. Battery storage is also increasing. It is hard to believe that anyone will be driving a gasoline-powered vehicle in 30 years, he says, forecasting that the price of oil will drop to nothing.
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5 Investing Themes to Remember for a Volatile Market originally appeared on usnews.com
