Investors recently got another painful lesson in the dangers of trying to time the market. With cash flooding into money-market funds, the S&P 500 shot up more than 20% from its low in October.
The investor skittishness is understandable. While a default of US government debt was avoided, the threat of a recession looms and the market rally has been fueled by a narrow slice of stocks. That has some market-watchers predicting a sharp fall — while others say all the cash on the sidelines could flow into the market and keep a rally going.
The uncertain outlook has some of the experts who shared investment ideas with Bloomberg pointing to trends such as the growing need for cybersecurity, and the move to diversify supply chains away from China
When the experts were asked how they would spend $1 million on a personal passion, answers ranged from a classic car used in James Bond movies to a portfolio of baseball cards to outfitting a house so it can become completely energy-independent.
Before putting new money into the market, take stock of your finances and investments, either on your own or with a financial adviser, to strengthen them where you can.
Stephanie Luedke, head of NB Private Wealth
Moving into Private Credit
The idea: When choosing to invest in this environment, it really comes down to when will we see the yield curve begin to normalize, which will incentivize investors to put more cash to work and move out of money-market funds. Public fixed-income markets could be the first stop on that journey, particularly if default expectations remain reasonable. One alternative for investors is an allocation to private credit, an asset class that has flourished over the last decade.
The strategy: Providing liquidity directly to a variety of borrowers, including small- and medium-sized businesses, real estate developers and distressed entities, warrants a higher yield on the debt. Beyond the more attractive initial yields, the floating rate is an additional benefit in this volatile interest-rate environment. In short, private credit can function as a yield and/or total return enhancer within portfolios by offering a combination of income and capital appreciation, along with diversification benefits. Investors should look for a provider with relationships to the private equity firms themselves. This allows the provider to see differentiated deals and be selective in choosing assets. – Amanda Albright
Allocating capital towards a passion should be first and foremost an intentional act meaningful to your core values. The founder of Neuberger Berman, Roy Neuberger, was passionate about art and supporting emerging artists during their lifetimes. The wonderful thing about supporting emerging artists is that you can enjoy their work regardless of whether it provides a financial profit down the line. You can support them by purchasing artwork, sponsoring an exhibition or donating to a philanthropic organization that serves artists. Recently, NB Private Wealth co-sponsored an exhibition at the Metropolitan Museum of Art for Cecily Brown, who is an incredible contemporary artist and whose paintings I personally love for the gorgeous use of colors and the thought-provoking images.
Alexandre Tavazzi, head of CIO office, Pictet Wealth Management
Changing Supply Chains
The idea: When you think about the next five years, you can’t look at the world like we did five years ago. A lot of companies are talking about the diversification of supply chains — thinking about where they produce, whether that place is efficient and if they need to have a back-up plan. We saw in the pandemic that depending on one country for your manufacturing can be very dangerous: If China stops functioning you can’t produce because you have no supply.
The strategy: With geopolitics having such a significant role today, manufacturers have to look at what countries are allied with their home country. You can see companies diversifying production to Southeast Asian countries such as Singapore, Vietnam and Indonesia. India, too, because India under Modi wants to become a real alternative to Chinese manufacturing. India launched a very ambitious plan to support companies that want to produce there. The infrastructure is not on the same level as China, but Modi wants to develop it and already on the trade front you can see that in the past two years Indian exports to the rest of the world are up 90%.
Investing in changing supply chains gets tricky. It’s not easy for coporations to get into the Indian market quickly, as the country’s infrastructure — such as the power supply or transportation networks — still needs to be developed. Vietnam, the country everyone mentions as a main beneficiary of supply-chain diversification, is very small. You have to understand which sectors are favored in each country, because they don’t all have the same level of manufacturing sophistication and quality.
As an example, some Chinese suppliers are moving to India together with phone makers to improve manufacturing quality on site. For the time being, assembling the most sophisticated phone still remains a challenge in India, but it will become a reality in the future. And winner takes all in this world, so you have large companies installed in these countries that may be getting the largest share of production at the expense of the smaller ones. – Suzanne Woolley
In a world where everyone is looking for energy supply, I would try to make myself completely energy independent. I would install solar panels on the roof of my house and couple them with big batteries, so whatever energy they produce during the day is stored and I can reuse it in the evening for my own consumption or to charge whatever electric car I might have. I’m waiting for my car to get old so I can replace it. The choices in electric cars are just going to increase and the prices will come down with mass production.
Thorne Perkin, president, Papamarkou Wellner Perkin
Invest in Cybersecurity
The idea: The need for cybersecurity to safeguard the digital world is a megatrend, cutting across every sector of technology. It is an expansive category, from companies using Big Data, machine learning and artificial intelligence to become leading IT firms. In 2023, nearly $190 billion will be spent by end users on information security and risk management and in 2025 that’s projected to rise above $239 billion, according to Gartner.
Microsoft, Amazon.com, Facebook, Adobe — they’re all obviously pouring money into it because a security breach for one of those companies would be disastrous. A McKinsey report projected that over the long run, the addressable market could be as much as $2 trillion.
The strategy: We’ve met with a lot of private equity groups investing in this space over the years, and we’ve invested with Evolution Equity Partners. They’re an international venture capital company started by a bunch of investment and technology entrepreneurs with operating experience, and they have experience taking companies public. Like any of these areas exploding in size you really need to focus on where you invest and on the team — whether they have a track record in sourcing transactions and competing for and executing transactions.
The companies in the fund are involved in areas including cloud security, the internet of things and application security, and adjacent categories including blockchain, quantum software or AI and risk management. Each fund targets a mix of earlier stage and some mid- and late-stage, but all pre-IPO. The fund typically makes an investment between $20 million and $100 million and they want to get in at a good inflection point, where the early-stage risk has been mitigated and the company’s revenue growth is accelerating. – Suzanne Woolley
Demand for classic cars has really grown and there’s been some huge appreciation. You have to focus on rarity, and like with any passion investment it makes sense to really invest in what you like. If you don’t make money on it, you still have a cool car. If you’re going to invest in one car, for my money it would be an Aston Martin DB5, which came out in 1964. It was introduced in the James Bond movie Goldfinger, and is considered one of the rarest and most iconic of all classic cars. The original price was under $13,000. One recently sold in Paris for $770,000. With a million you could buy one for $750,000 and still have money for the mechanic, the insurance and the storage.
Todd Jablonski, chief investment officer, head of asset allocation, Principal Asset Management
The idea: A globally diversified 60/40 stock-bond fund continues to make a great deal of sense. Especially now, as the positive correlation between stocks and bonds may have peaked. Asset allocation moved out of vogue toward year-end 2020 as the correlation between stocks and long-term government bonds rose sharply. By the end of May this year their trailing 12-month correlation stood at +0.60, near recent 2023 highs and at levels not seen since the late ‘90s. Peak correlations underscore an opportunity due to mean reversion and fundamental forces that point to a falling correlation.
The strategy: I’d invest $1 million with an underweight to equities, at 58%, and an overweight to fixed income at 42%. Within equities, I’d underweight the US to a 32% target. While the US economic picture looks resilient, the outlook is poor relative to other economies. Within US equities, we prefer large-caps (about 23%) for a low volatility profile, remain neutral on mid-caps (about 8%), and we’d underweight small-caps to around 1%.
Diversification via a 20% weight to developed ex-US markets and 6% to emerging market equities seems reasonable. Europe features positive momentum and cheap valuations, while Japan offers a strengthening economy and potential Yen appreciation. Emerging markets tend to be idiosyncratic, but China’s economic path forward holds investment appeal, as do the low, low valuations in Latin America.
In fixed income, the tactical outlook for lower-volatility core fixed income is positive. Treasuries (a target of 9%), mortgages (12%), and investment-grade corporates (12%) feature good levels of income, and our medium-term view is that a US recession will ultimately put further downward pressure on yields. Smaller positions in non-core preferred securities (3%), high-yield bonds (4%) and emerging market debt (2%) provide a diversifying underweight to higher-volatility fixed income. – Claire Ballentine
A fun strategy might be to invest in super-high-end baseball cards. Rare vintage cards can go for six-figures at auction, and there’s an active and fragmented online market. One could buy a handful of legendary +$20,000 player cards and then hundreds of undervalued rookie and prospect cards of top current players in the $150 to $300 area. Then look for growing demand and limited supply to work their magic over several decades. My short list of all-time greats includes Stan Musial, Jackie Robinson, Mickey Mantle, Joe DiMaggio and Mike Trout. For 2023 young talents, there’s Corbin Carroll (Arizona Diamondbacks), Wander Franco (Tampa Bay Rays), Julio Rodriguez (Seattle Mariners), Jordan Walker (St. Louis Cardinals) and Gunnar Henderson (Baltimore Orioles).
© 2023 Bloomberg L.P.
By Suzanne Woolley, Claire Ballentine and Amanda Albright