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Investors' appetite influenced by geopolitics and inflation

Investors' appetite influenced by geopolitics and inflation

created Forex ClubAugust 26 2022

Last year, investors were optimistic. Interest rates were low, central banks were printing money, and there was hope that COVID would soon end. The stock market ended 2021 with a profit of over 2022%. It can be said that investors had grounds to look at XNUMX with confidence.

One, so far, 2022 has not lived up to expectations

The first problem is inflation. It continued to grow due to disruptions in commodity supply chains and rising oil and gas prices. The significant increase in wages, resulting from the ubiquitous retirement of employees by COVID, also contributed.

The second problem is the growing evidence that the growth rate of the world economy is slowing down. This slowdown is particularly acute in Europe, where, for example Bank of England predicts the UK economy will be in recession for five consecutive quarters. Even the United States, despite a better energy situation, may not avoid recession: some models predict that the US economy will also be in recession for much of 2023.

As a result of these problems, investor sentiment became more pessimistic earlier this year. In June, sentiment was as bad as it was during the 2008 global financial crisis.

The mood has improved in the last two months. Commodity prices and interest rates have fallen. This helped, above all, the technological actions - them NASDAQ index, compared to the June bottom, it increased by 20 percent. This surprised many investors, including professionals. Fund managers held a lot of cash during the boom and missed out on some opportunities.

Investors should choose their assets carefully

Judging by the strong gains in the past two months, investors hope that the US central bank will be able to provide the US economy with a soft landing. Personally, I'm not that optimistic. Concerns about growth have not gone away: for example, data released this week show that the US housing market is plummeting. We still cannot declare a victory in the war against inflation: measures published by the US central bank show that inflation, devoid of temporary effects, remains at the level of 5-6%.

As the inflation problem has not been resolved, there is a good chance that interest rates will have to go even higher than market expectations. This would be very bad news for the stock market. Therefore, in my opinion, now is the time to defend yourself. In the stock market, I like defensive sectors like healthcare, telecommunications and consumer goods. Their companies tend to do well regardless of economic conditions. Many Healthcare and Consumer Staples it also has low debt, which makes it immune to rising interest rates.

You should also consider keeping cash, especially in US dollars. The US dollar usually performs well during global recessionswhile the euro, commodity currencies such as the Canadian and Australian dollars, and emerging market currencies suffer. Because Federal Reserve raises interest rates, investors will soon be able to earn 3%. annually. Such high rates were last seen in 2007. I think the time to play offense and switch to riskier stocks will come in 2023, when the economy hits rock bottom.

In the 70s, the execution of a stock exchange transaction on the American market could cost EUR 100. In the 80s, entering the market of discount brokerage houses lowered the costs to EUR 50. Then, with the advent of online brokers, the cost dropped to € 20 and then € 10.

Today, platforms such as eToro they don't charge any commission for trading stocks. This means that costs are no longer a barrier to investing in the stock market, no matter how small your portfolio is. As many platforms now offer fractional shares, you can invest as little as € 10 at a time.

Another issue that has changed over the years is the availability of information. Press releases, media articles, and analyst research are easily accessible to everyone. Even more information can be found on external websites such as CNBC, MarketWatch, The Motley Fool, and Seeking Alpha.

There is still an appetite for investing in cryptocurrencies

Although bitcoin price this year fell by almost 50%, it should be remembered that in the last two years it has more than doubled.

Part of the explanation for the continued interest in cryptocurrencies is that they are a highly volatile asset class. Some investors like this volatility, so I think cryptocurrencies will remain a trading tool for adventurous traders.

Regarding their function as investment tools, in my opinion, it is not yet clear, although my opinion is probably in the minority here. People say cryptocurrencies are being adapted by individual investors. I'm an old school value investor myself and enjoy having assets that pay dividends, which cryptocurrencies don't. Gold has been around for thousands of years, bitcoin has only been around since 2009. Will it still exist in 2100 or 2200?

I admit that while cryptocurrencies have recently been heavily tied to the stock market, long term the correlation is rather low. This suggests that cryptocurrencies can act as a valuable wallet diversifier. When building an investment portfolio, a new investor should remember that it is important to ensure adequate diversification in each investment portfolio. Don't put all your eggs in one basket!

Research has shown that the average individual investor owns only four shares. That's not enough. An appropriately diversified portfolio will have a minimum of 20-60 stocks from different geographic regions and sectors.

Additional diversification can be achieved by investing in different asset classes: bonds, commodities, real estate, and cryptocurrencies. Their mix will depend on the individual's risk appetite. People with a high risk appetite will spend more on stocks, people with a lower appetite more on bonds.

Even if an investor does not want to choose stocks, bonds or other assets himself, building a diversified portfolio is not difficult. Stock exchange funds that automatically provide a high level of diversification have become widespread. Stock funds, bond funds, and commodity funds can be found very easily. They are cheap to buy and maintain.

Modern investment platforms give users even more opportunities for diversification. On eToro it is possible copying other people's activities. Some platform users specialize in stocks, others in currency trading, still others in cryptocurrencies. All these activities can be copied. The platform also offers ready-made baskets of stocks that investors can buy. For example, you can invest in a basket of 30 renewable energy shares with one click.

Nobel laureate economist Harry Markowitz reportedly once referred to diversification as the only "free lunch" with investing. Today, thanks to online investment platforms, using it is easier than ever.

About the Author

Pietari Laurila - a full-time investor living in London. Laurila invests her money on the eToro investment platform where she is one of the Popular Investors. Laurila has over 10 followers and 000 users copying him on eToro. His strategy focuses on stocks of value. Its return in 3000 was + 2021%. CopyTrading allows you to copy Laurila's strategy to eToro.

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