Stock markets are likely to fall this summer, which will provide investors with a key buying opportunity to enhance their portfolios, says the CEO and founder of one of the world’s largest independent financial advisory, asset management and fintech organisations.
Nigel Green of deVere Group’s comments come as UK inflation exceeds expectations in May and as the US Federal Reserve Chair Jerome Powell confirms that interest rate hikes should be expected as inflation is “well above” where it should be.
Mr Powell stated: “Inflation pressures continue to run high, and the process of getting inflation back down to 2% has a long way to go.”
Meanwhile, UK inflation on Wednesday was higher than expected in May, as consumer prices climbed by an annual 8.7% – considerably higher than the Bank of England’s 2% target.
The deVere CEO observes: “inflation remains high and sticky – surprisingly so – in most major developed economies.
“This puts fresh pressure on central banks to maintain interest rate hikes, or drop the pause in the case of the US Fed.”
Higher borrowing costs impact corporate profits as companies may face higher interest expenses on their existing debt or find it more expensive to finance new projects. This typically leads to a decrease in investor confidence and a decline in stock prices.
Interest rate jumps can discourage consumer borrowing and spending. When borrowing costs increase, individuals may be less willing to take on new loans for purchases such as homes, cars, or other consumer goods. This reduced consumer spending can negatively affect the earnings and profitability of businesses, leading to a decrease in stock prices.
In addition, rising interest rates make fixed-income investments, such as bonds, more attractive relative to stocks. As bond yields increase, investors may reallocate their investments from stocks to bonds, seeking higher returns with less risk.
“Therefore, investors should be cautious as we expect stock market corrections this summer,” says Nigel Green.
“This would present major buying opportunities for investors to enhance their portfolios with quality stocks at lower entry points.
“They’ll be speaking with financial advisors about potential winners and losers from such a fall.”
US stocks were down on Wednesday, with the S&P 500 and the Nasdaq dipping around 0.4%, while the Dow Jones shed 0.3%. In the UK, the benchmark FTSE 100 fell to a three-week low.
Against a backdrop of still sticky-high inflation, sectors that do well in a stagflationary environment should also be included in portfolios.
“These include commodities, such as oil, as their prices typically rise in response to inflation; consumer staples like food, and hygiene products, as demand is likely to remain relatively stable; healthcare, as it provides essential services that are less affected by economic cycles; and utilities, including electricity, gas, and water as demand will also be pretty consistent,” noted the deVere CEO recently.
“Investors should, as always, remain diversified across asset classes, sectors and regions in order to maximise returns per unit of risk (volatility) incurred.”
He concludes: “We expect further and intensifying market volatility this summer. This will be used, as it always is, by investors to bolster their investment portfolios.
“This can prove to be an extremely effective strategy, but advice should be sought from a quality fund manager.”