Being on course can be key to wartime investing

The whole sector of the world economy is in turmoil after Russia’s invasion of Ukraine, with investors worried about how they should react. Do they have to buy energy stocks? Shares of defense contractors? What about agriculture? Is it time to go cash?

Russian President Vladimir V. Even before Putin attacked, there was good reason for investors to be cautious. First-quarter market forecasts forecast a return of less than 5 percent for the S&P 500. A report by financial data company Factset Research states that the level of such slow growth will be the lowest since the fourth quarter of 2020.

Instead, the S&P 500 ended up for the quarter, losing 4.9 percent. Fear of inflation triggered a sharp fall in late January, and stock prices remained volatile even before the Russian invasion began in late February. The stock price plunged immediately before the attack, returned to the ground, then plummeted further in early March. But since February 23, the day before the attack, the index has risen 7.2 percent for the quarter, suggesting that Ukraine is worrying some markets more than the war.

Brad Macmillan, chief investment officer at Commonwealth Financial Networks, said: “Initially, there was a lot of fear about what might happen and most of what usually happened didn’t happen, so people are backing down.” “Most investors think, ‘This is not something I have to think about from a financial point of view,’ and that’s right.”

Needless to say, the investors who made the obvious war drama were not able to cash in on the killings. The embargo cut off Russia’s oil exports and the energy sector was forecast to recover in 2022 before ending its 52-week high. Defense industry exchange-traded funds, or ETFs that can be bought or sold as stocks throughout the day, are turning out to be the same result, iShares US Aerospace & Defense ETF, SPDR S&P Aerospace & Defense ETF and Invesco Aerospace & Defense ETF all gain. In addition to the additional pressure on the already tangled supply chain, the expected disruption of Ukraine’s huge wheat crop has also pushed up commodity funds.

Instead of worrying about Mr Putin, investors were approached by Federal Reserve Chairman Jerome H. Powell should be considered. The Fed raised interest rates by a quarter of a percentage point in March for the first time since 2018 and forecast six more hikes this year.

“Almost all of the market reaction in the last four to six weeks can be attributed to the Fed and how interest rates have shifted,” Mr Macmillan added. “There has been very little response to the events in Ukraine.”

Investors do not fully understand what rising interest rates mean for financial sector stocks, especially banks and insurance companies, which have long suffered near-zero interest rates, said Regent Atlantic, co-chief investment officer. “The market is not yet priced. Financial stocks are going to see the benefits from higher interest rates,” he said. “Banks can make much higher interest rate margins, especially with short-term rate hikes.”

One fund he is pursuing is the Invesco S&P 500 Pure Value ETF, which invests in S&P 500 value stocks, with about 40 percent of the fund’s holdings coming from the financial services sector.

Stocks that could suffer high losses include shares of small, emerging software and e-commerce companies and other capital-intensive technology companies that rely heavily on low-interest loans until profitable, Mr Kaprin said.

Private investors should also maintain a long-term horizon during retirement, which could last 30 years or more, says Simon Hyman, a global investment strategist at ProShares. This means ignoring stock play based on temporary rise.

“Historically, the downturn in equity markets has been fairly short-lived since major geopolitical events,” Mr Hyman said. “If you look at what happened after 9/11, the global epidemic or the invasion of Kuwait, the recession was measured in weeks or months.”

One fund that focuses on interest rates is prospective equities for Rising Rate ETFs, which are limited to sectors that have historically outperformed the market when rates are rising. About 80 percent of its holdings are in the financial, energy and material sectors. For a more defensive position, the ProShares S&P 500 Dividend Aristocrats ETF, a fund of stocks with rising dividends that can offset the effects of inflation and rising rates.

Amy Arnott, Morningstar’s portfolio strategist, has strongly warned investors against dumping stocks and going cash. The slight return of bank deposits and money market funds will not necessarily improve with the Fed rate hike and, even if they do, they will not be able to beat inflation, resulting in a loss in real dollar terms. Worse, bailing out stocks raises the challenge of deciding when to return.

“When there is a lot of uncertainty you can always find a good reason to sell,” said Mrs. Arnott, “but markets bounce faster than people expect.”

He said it was important not to ignore consumer heads and to assume that inflated operating costs would cut corporate margins. The reality is that while these companies are able to pass on their increased costs to consumers, some companies use inflation to hide additional price increases.

“Consumer staples tend to hold up really well whenever there is a lot of volatility in the market,” said Mrs. Arnott.

Many analysts say investors should also pay close attention to bond funds. Bonds act as an important stabilizer in a diversified portfolio, but today’s rising interest rates hurt the value of existing low-priced bonds. This trend will reverse as old bonds mature and will be replaced by newer, higher-priced bonds. Meanwhile, the yield on five- and 10-year corporate bonds is close to 4 percent.

There has been a lot of talk about “the price has gone up and the value of my bond fund has gone down”, but your bond fund can now reinvest your money in higher returns, “said Mr Macmillan.

Liana Devini, vice president of the Fidelity Investors Center in Framingham, Mass., Says: Re-balance your holdings.

“During volatile markets, the diversity of your assets may change, and rebalancing gives you the opportunity to manage risk and align your investments,” said Mrs. Devini. “We want to buy low and sell high, and it’s a great way to rebalance.”

How often investors should rebalance their holdings depends on the level of market volatility, he added. The Fidelity Management team has already balanced the investment six times this year.

For investors still concerned about Ukraine, the CUVID, supply chain deficits, oil prices and other geopolitical instability, the best course of action is to consolidate a diversified portfolio that can handle the global crisis without the need for greater coordination. And analysts say investors who have already done so should not make any knee-jerk decisions.

“The best advice for investors is to try to resist the urge to make dramatic changes to your portfolio,” said Mrs. Arnott. “As long as your original plan still makes sense, stick to your plan, align your portfolio with your goals, and rebalance if necessary.”

After all, if investors are still worried, consider Mr. Macmillan’s observation of the Commonwealth Financial Network: “If you look at the last century and how markets work during war, they actually do better,” he said. “As a citizen, am I worried? Absolutely. As an investor, not so much. “

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