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Looking beyond the soft patch: A mid-year investment outlook
By Jeff Savage, Wells Fargo Bank regional chief investment officer
The global markets have hit a soft patch brought on by temporary factors, including the Arab spring, Japan’s triple disaster, severe weather disruptions and the winding down of extraordinary economic stimulus initiatives in the U.S.
As we enter the second half of 2011, here are five investment themes for you to consider for the next six months of the year:
1) Global investment focus – Given the uneven expectations for domestic growth, you might benefit by taking a global perspective. Most of us are global consumers, so shouldn’t we consider investing in those countries from which we import goods and services? An investment strategy that includes domestic stocks, combined with international exposure, is an excellent way to take advantage of foreign opportunities. Depending on your financial situation, a 25 to 35 percent weighting to international markets could be appropriate.
2) Diversify income streams – Treasury yields have moved to very unattractive levels, especially when considering the inflationary risk that you’ll likely face in the near-to-intermediate term. To satisfy income needs, you might want to look at other types of investments. Here are a few options:
- Corporate bonds (investment-grade and high-yield) can provide higher yields. These bonds might also be less sensitive to swings in interest rates.
- Municipal Bonds are currently yielding as much as Treasurys while providing a tax advantage to investors. Strong growth in tax revenues and sizable budget cuts at the state and local levels offer reasons for an improved outlook in this area.
- Foreign Bonds (developed and emerging) might offer higher yields as well as sovereign and currency diversification.
- Global dividend-paying stocks might provide income as well as a greater potential for capital appreciation.
- Real Estate Investment Trusts (REITs) and Master Limited Partnerships can be volatile, but some offer attractive dividend yields.
- Hybrid income products can help investors reach income goals. These funds include multiple asset classes with income-generating potential and are actively managed to provide a consistent source of income and capital protection.
- Option strategies, such as covered calls, might help investors achieve incremental yield on owned assets by generating income from an option sale.
3) Currency opportunities – The dollar likely will face pressures from high debt, modest economic growth and persistent trade imbalances. Within an investment portfolio, currency holdings might add an additional level of diversification and have the potential to reduce the overall portfolio risk. Currency diversification can also be a way to benefit from a country’s strong economic growth, without necessarily taking firm or credit risk that is present in equity and bond investments. There risks are associated with this market, though. It is not regulated and volatility is high because currencies are affected by many economic and political factors. Furthermore, currencies can overshoot fair value for long periods of time.
4) Manage volatility – The first half of 2011 ended with nearly all of the major fixed income and equity indices posting very respectable gains. To view just the starting point and the ending point, you could assume markets had experienced a fairly quiet first half, but that would be a mistake. Continuing uncertainty means you must remain vigilant about managing volatility. Work with an investment professional who can help keep your portfolio diversified, determine the appropriate asset allocation given your financial goals and risk tolerance and regularly rebalance your portfolio when asset classes drift more than 10 percent from your target allocation.
5) Fuel for the global economy – Commodity prices should continue to trend higher as economies around the world contribute to positive (albeit, less vigorous) global growth. Emerging economies are spending billions on infrastructure. China is building a $1 trillion high speed rail line. India is spending $500 billion on highway improvements and Brazil has budgeted $900 billion for energy and transportation projects. Infrastructure is not only a driver of higher commodity prices, but is in itself an attractive way to capitalize on the tremendous growth emerging economies are experiencing. You might want to invest in the technology, industrials and energy sectors as a way to gain exposure to this trend.
You can’t avoid the current tumultuous economic environment. You can, however, take advantage of current investment opportunities that can help keep you well positioned for the remainder of 2011 and into 2012. Contact your investment professional to discuss these five themes and determine how these recommendations may apply to your portfolio.
Based in Portland, Jeff Savage is the regional chief investment officer for Wells Fargo Private Bank in Oregon, Washington, Alaska, Colorado, Idaho, Montana, Utah and Wyoming. He can be reached at (503) 886-2472 or jeffrey.w.savage@wellsfargo.com.
