The current global environment raises many questions for investors, and sudden changes in the markets are forcing them to reassess risks.
Factors currently shaping the investment environment:
- Rising cost of capital. U.S. Treasury yields are hitting record highs (10-year yields are approaching 4.7%, while 30-year yields have reached an 18-year high of nearly 5.2%). This directly increases borrowing costs for businesses and households around the world.
- Rising expectations of interest rate hikes have prompted investors to sell off bonds and slowed the stock market rally—with the technology and industrial sectors feeling the pressure the most.
- The conflict between the U.S. and Iran and the situation in the Strait of Hormuz are acting as a geopolitical driver of inflation. Oil prices remain as much as 60% higher than before the conflict.
What is a possible course of action for investors? Gintaras Rutkauskas, CEO of Evernord Asset Management, recommends considering several steps:
- Reduce the proportion of high P/E stocks in your portfolio, as rising interest rates increase the cost of capital, which lowers the present value of future cash flows and puts downward pressure on the prices of such stocks.
- Invest in short-term corporate bonds, and even better, those with floating interest rates (linked to EURIBOR). As interest rates rise, the value of fixed-coupon bonds falls, while the yield on floating-coupon bonds increases.
- Buy bank stocks, as rising interest rates widen banks’ margins between deposits and loans.
- Choose real estate, especially commercial properties, where rental rates in the leases are indexed to the rate of inflation.