In addition to protecting from downside risks, managing portfolios involves constantly looking for opportunities to shift assets into undervalued positions.
Looking forward, here are some of the areas we see may yield such opportunities:
China: The nascent, volatile market dropped precipitously at the start of the year, following their economy’s slowest growth figures in 25 years.1 Most SRI portfolios do not own Chinese stocks, insulating direct losses in most cases. However temporary drops in periphery markets have been unavoidable and are creating good buying opportunities.
Interest rates: With the Federal Reserve having begun what will likely be a series of rate hikes, we can now factually say we are in a rising interest rate environment. Higher interest rates mean higher borrowing costs, which has a greater negative effect on assets with heavy debt loads. We believe there are certain companies and sectors that have been inordinately punished due to speculation of more aggressive rate hikes in 2015 and so we are looking for good buys in the energy, utilities, and REIT sectors.
Eurozone recovery: The ratio of the total U.S. equity market cap to GDP is higher now than at any post-1950 bull market peak (save the Internet bubble back in 2000), compared to the same ratio in European countries which are very close to their historical means.2 With the European Central Bank seemingly committed to accommodative monetary policy and the United States in a rising-rate environment, will European equities outperform U.S. equities in 2016?
Oil prices: We won’t make predictions about whether oil will rebound in 2016, but rather we’ll simply state that, we remain committed to investing in renewable, clean sources of energy. In 2015, solar officially became a cheaper method of energy production than fossil fuels in six of the major metropolitan areas in the U.S.3 Consider this: if oil prices stay depressed, then oil stocks suffer. If they rise, then renewables become even more competitive over the long-term. Where do you want your money?
Election year: Interestingly, 2015 was the first pre-election year since 1939 to end in negative territory.4 The theory goes, that presidents tend to utilize fiscal policies to bolster the economy in pre-election years so that they or their party’s nominee will have ammunition with which to re-win the next presidential term. Will Obama make up for lost ground in 2016?
Many analysts were predicting a positive year in the U.S. market before January happened, reminding us that anything can happen and none of us has a crystal ball. In a future post we'll write more about three tools to help us navigate the unknowns: stay diversified, buy quality assets at good prices, and maintain a long-term perspective.
1. "China's yuan firms as central bank keeps pressure on speculators" Reuters. Jan 18, 2016.
2. "Investing In a Rising-Rate Environment, Energy, Utilities, REIT and Health Care Sectors Are Likely to Outperform as Fed Starts to Tighten" Investment News. Dec 30, 2015.
3 "Solar & Wind Just Passed Another Big Turning Point," Bloomberg Business. Oct 6, 2015.
4. "Presidential Elections and Stock Market Cycles: Can You Profit From the Relationship?" Graziadio Business Review. 2004 Volume 7 Issue 3.