Important information: The value of investments and the income from them, can go down as well as up, so you may get back less than you invest.
APPROACHING the end of the first month of the year, stock markets have already hit a road block. Technology stocks in the US are down, the FTSE 100 is back where it started the year and tensions in Ukraine are beginning to cast a long shadow.
The fall from grace of some the world’s largest companies since the start of the year – the likes of Apple, Amazon, Microsoft and Tesla – is probably down to a couple of themes.
The big story is that interest rates are set to rise this year, reducing the appeal of shares in companies that stand to earn most of their profits far forward into the future.
Furthermore, as the world continues to emerge from Covid, consumer buying habits are only likely to return closer to normal, favouring the big businesses of yesteryear.
For investors, this could be the ideal time to adopt a balanced approach in terms of investment style.
A combination of investments in undervalued companies exposed to improving economic conditions – such as many of those held by Warren Buffett over the years – together with some holdings in tech names that have suffered during the recent sell-off could prove an excellent route to smoothing returns.
This is how it could work. Should concerns about the effects of rising interest rates on economic growth begin to dominate, markets may return to attaching higher premiums to companies able to grow their earnings year in, year out. That could be the trigger for a return to tech.
In the US – still the world’s most dominant market by far – company earnings are expected to grow by about 9% this year, compared with 45% in 2021. The technology sector is anticipated to grow profits slightly faster than this – by about 10%1.
If tech stays under pressure, however, then the focus is likely to remain on good old fashioned industrial names, banks and oil producers – those types of company with the most to gain from broad improvements in the world economy.
That would provide a further boost to value-oriented investing styles, focused on unfashionable areas of the market and companies with attractive dividend yields.
The earnings for US industrial businesses are expected to increase by 35% this year, albeit from a considerably more depressed base when compared with the technology sector2.
Investors can construct a portfolio that is diversified in terms of investment style by choosing funds from Fidelity’s Select 50 list. For example:
The Fidelity Global Special Situations Fund has a large exposure to US companies and some of the world’s largest tech names. Large fund positions currently include: Alphabet (Google), Amazon, Apple and Microsoft.
On the other hand, the Artemis UK Select Fund is a value-tilted fund that should benefit from a continuation of Britain’s recovery and an exposure to survivor companies from the pandemic now seeing less competition. Current large holdings include: the alternatives investment company 3i, Barclays and the research and manufacturing business Oxford Instruments.
Both funds feature among Tom Stevenson’s four Fund Picks for 2022.
1 FactSet, 13.01.22
2 FactSet, 13.01.22
Important information: Investors should note that the views expressed may no longer be current and may have already been acted upon. Reference to specific securities should not be construed as a recommendation to buy or sell these securities and is included for the purposes of illustration only. Select 50 is not a personal recommendation to buy or sell a fund. The Fidelity Global Special Situations Fund invests in overseas markets so the value of investments can be affected by changes in currency exchange rates. The fund also invests in emerging markets which can be more volatile than other more developed markets. The fund may use financial derivative instruments for investment purposes, which may expose the fund to a higher degree of risk and can cause investments to experience larger than average price fluctuations. The fund has or is likely to have, high volatility owing to its portfolio composition or the portfolio management techniques. Fidelity Global Special Situations Fund uses currency hedging to substantially reduce the risk of losses from unfavourable exchange rate movements on holdings in currencies that differ from the dealing currency. Hedging also has the effect of limiting the potential for currency gains to be made. The Artemis UK Select Fund uses financial derivative instruments for investment purposes, which may expose the fund to a higher degree of risk and can cause investments to experience larger than average price fluctuations. The fund has or is likely to have, high volatility owing to its portfolio composition or the portfolio management techniques. The fund may invest in bonds where there is a risk that the issuers of bonds may not be able to repay the money they have borrowed or make interest payments. When interest rates rise, bonds may fall in value. Rising interest rates may cause the value of your investment to fall. This information is not a personal recommendation for any particular investment. If you are unsure about the suitability of an investment you should speak to one of Fidelity’s advisers or an authorised financial adviser of your choice.
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