- While allocating your money in offshore stocks, it is advisable to benchmark on the exchange-traded fund (ETF) such as the SP500 ETF to achieve 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 where the stocks are operating.
With inflation rapidly eating away purchasing power, it is imperative to invest in a vehicle that gives returns above the inflation rate. The Kenyan inflation rate is 5.73 per cent according to data from the Central Bank of Kenya. In the US, it stands at seven per cent, the highest level since 1982.
While allocating your money in offshore stocks, it is advisable to benchmark on the exchange-traded fund (ETF) such as the SP500 ETF to achieve market returns or you can concentrate your allocations to a smaller batch of companies.
But 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 where the stocks are operating. This involves putting in hours of research and study.
The current economic environment in the US is characterised by abnormally high inflation, a very low unemployment rate of 3.9 per cent, an ultra-low federal funds rate of 0.1-0.25 per cent, and a massive quantitative easing programme of $120 billion every month that started reducing by $15 billion a month since December. This is a perfect recipe to stimulate economic growth.
The downside is inflation that is causing high consumer prices and hurting household budgets. To address this threat, the US has promised to conduct at least three interest rate hikes this year with the first expected in March. Experienced stock traders know that an interest rate rise largely benefits the banking industry.
There is a strong possibility that banking stocks will do well under these conditions assuming that there will be no more covid-19 restrictions and that economic activity accelerates in 2022.
In 2021, both West Texas Intermediate (WTI) oil and Brent oil made 55.5 per cent and 50.5 per cent gains respectively. This led to a similar performance in energy stocks across the US and Europe.
The growth was largely attributed to the lowering of covid-19 restrictions, reopening of global economies, and a surge in economic activity that drove oil demand higher.
This year, the price of oil is expected to continue going up towards $100 per barrel as global demand continues rising. This is already gaining momentum as investors shrugged off Omicron's fears and bet on higher oil prices driving the prices over four per cent higher.
This could in turn increase revenues in the energy sector thereby delivering alpha returns for the year.
This being a unique year that starts at a seven per cent inflation rate, companies will be forced to raise product prices and transfer the inflation cost to consumers.
On the other hand, buyers may reduce the expenditure on consumer discretionary products and maintain the quality and quantity of purchases in the consumer staples sector. What this means is that people will still buy bread and milk but may find it harder to purchase a new set of furniture or vehicle because their purchasing power is eroded by inflation.
As an investor, it makes good sense to purchase consumer staple stocks as these companies have the power to increase prices while maintaining demand for their products. Any consumer staple stock that demonstrates a strong pricing power will be a favourite of investors looking to exploit this market feature.
Investors will also be considering allocating some of their money to luxury goods stocks. Luxury products are classified as Veblen goods (high-quality goods that are made well, are exclusive, and are a status symbol) and their demand tends to increase with higher prices.
Since such products are considered a show of wealth and status, when their respective price increases, they are seen as more attractive as they represent an even high status.
Some firms that produce luxury items will offer a limited quantity of each product. So, when they raise the price and demand increases, customers hurry to buy more as the existing supply reduces to a defined maximum supply. This means that the company can easily hike prices during an inflation period to make extra revenue.
Over the past 22 years, technology stocks have demonstrated a record of delivering strong growth even in times of adversity. This is because they can easily scale their products while minimising expenses.
Over this period, it has become difficult to separate technology stocks from growth stocks as they have overly been the ones beating the overall market returns year over year.
These includes rapidly growing companies such as Tesla, Google, Amazon, Netflix, Facebook, Twitter and Apple.
The best time to start investing was yesterday. The next best time is today.
Rufas is a Research & Markets Analyst at Scope Markets Kenya