So is now the right time to invest?

Economic headwinds are easing. So should investors commit fresh funds to the stock market? Such calls are rarely straightforward. But when beaten-down sectors look really cheap, I’m often minded to take more risk.

| More on:

The content of this article was relevant at the time of publishing. Circumstances change continuously and caution should therefore be exercised when relying upon any content contained within this article.

Edinburgh Cityscape with fireworks over The Castle and Balmoral Clock Tower

Image source: Getty Images

You’re reading a free article with opinions that may differ from The Motley Fool’s Premium Investing Services. Become a Motley Fool member today to get instant access to our top analyst recommendations, in-depth research, investing resources, and more. Learn More.

Five weeks on, and no more mid-sized US banks have collapsed. No more large Swiss banks have folded, either. Energy prices have started to fall. Food price inflation may be moderating. The talk now is increasingly of falling interest rates, not rising interest rates. And the consensus view appears to be the UK economy isn’t going to contract in the months ahead, after all.
 
What’s more, relations between the UK and the European Union seem a lot less combative, too. The grown-ups are in charge, and common sense is starting to prevail. For an island-based economy that’s heavily dependent on trade inflows, that is welcome news.

And as if on cue, Deloitte’s quarterly survey of finance directors has recorded a sharp uptick in optimism — the biggest uptick since the Covid vaccine rollout, apparently. Finance chiefs are still cautious, seems to be the message — but cautiously optimistic.
 
So should investors commit fresh funds to the stock market?

Not one question, but two

In my years of investing, I’ve seen such moments before.

And the question of whether to commit fresh funds to the market is really a question with two halves. Is it the right thing to do? And which stocks are looking cheap?
 
Now, you might imagine that those two questions need considering separately, with the first one being considered first. After all, what’s the point of researching cheap shares if you’re not going to invest?
 
But in this case, it’s not that simple.

Greater appeal, greater risk appetite

And that’s because questions such as “Is committing fresh funds to the market the right thing to do?” very rarely have clear-cut, cut-and-dried answers.

In point of fact, in recent times I’ve seen a situation that clear-cut only once: in February 2009, when I switched an entire stranded gilts-based Equitable Life pension into stocks, with another provider.

Essentially, questions such as “Is committing fresh funds to the market the right thing to do?” always has an element of uncertainty, if not outright doubt.

But if shares are looking really, really cheap, then I’m prepared to take a commensurately greater amount of risk.

Two sectors that are looking cheap

And right now, while the Footsie is tantalisingly close to the all-time highs that it reached in mid-February — before banks began imploding — there are plenty of shares that aren’t particularly cheap.
 
At least, not by comparison to their recent histories. (Compared to international markets, though — markets such as Asia, America, and some European markets — the UK market as a whole is screamingly cheap. That, however, is a story for another day.)
 
But two sectors stand out. First, hospitality — pub chains, entertainment, hotels, that sort of thing. And second, Real Estate Investment Trusts, otherwise known as REITs, and similar property companies (not every property company is a REIT).

Now, hospitality is undeniably cheap. But it’s facing an awful lot of headwinds: energy prices, foodstuff inflation, depressed demand thanks to cash-strapped consumers hit by the cost-of-living crisis, and so on.

Property faces fewer headwinds — and those are easing

Property, though, looks cheap and is facing far fewer headwinds.

And the biggest of those headwinds — sharply rising interest rates — could well be disappearing. High interest rates adversely affect new asset values, and also hit leveraged REITs with higher interest costs. And most REITs, it’s fair to say, are leveraged: debt ratios north of 30% are common. So tanking share prices haven’t been too surprising.
 
Other headwinds are lessening, too. Fears of a recession are easing, for instance.
 
And the much-heralded “death of the office” now seems a little over-stated — and in my own case, many of the property companies that I most prefer have little exposure to offices, anyway.

Shares I like

Shares such as Warehouse REIT, which invests in warehouses, for instance. Primary Health Properties, which owns and rents out doctors’ surgeries. Aberdeen European Logistics Income, which invests in large warehouses in Europe. Tritax Big Box, which does the same here in the UK. LXi REIT, which owns and rents out a mixed portfolio on long index-linked leases. Empiric Student Property, which rents out upscale student accommodation. And Supermarket Income REIT, which owns supermarkets.

And so on, and so on. Many such REITs are looking oversold.

Is committing fresh funds to the market right now the right thing to do? I don’t know. The runes, as ever, are difficult to decipher. But in the case of commercial property, I’m increasingly minded to take the risk.

Should you invest, the value of your investment may rise or fall and your capital is at risk. Before investing, your individual circumstances should be assessed. Consider taking independent financial advice.

Malcolm owns shares in Warehouse REIT, Primary Health Properties, Aberdeen European Logistics Income, Tritax Big Box, LXi REIT, Empiric Student Property, and Supermarket Income REIT. The Motley Fool UK has recommended Primary Health Properties Plc, Tritax Big Box REIT Plc, and Warehouse REIT Plc. Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors.

More on Investing Articles

Young black colleagues high-fiving each other at work
Investing Articles

2 FTSE 100 value stocks I’d buy for my Stocks and Shares ISA in March!

Now could be a great time for fans of FTSE 100 value stocks to go investing. Here are a couple…

Read more »

Three signposts pointing in different directions, with 'Buy' 'Sell' and 'Hold' on
Investing Articles

Looking for value stocks? Here’s 1 I’d buy and 1 I’d avoid!

This Fool delves deeper into two value stocks she’s had her eye on and explains why she’s bullish on one,…

Read more »

Young black woman using a mobile phone in a transport facility
Investing Articles

With the Airtel Africa share price in pennies, is it a bargain?

With the Airtel Africa share price having slumped by a quarter in just one month, this shareholder considers some of…

Read more »

Asian man looking concerned while studying paperwork at his desk in an office
Investing Articles

Are these 2 defensive FTSE 100 stocks shrewd buys after recent updates?

This Fool takes a closer look at these FTSE 100 stocks. She admires their defensive traits -- but does that…

Read more »

Portrait of elderly man wearing white denim shirt and glasses looking up with hand on chin. Thoughtful senior entrepreneur, studio shot against grey background.
Investing Articles

The FTSE 100 closes up after full-year results from leading UK firms – are they buys?

Earnings season brings about a lot of ups and downs for the FTSE 100. Yesterday had some particularly good releases,…

Read more »

artificial intelligence investing algorithms
Investing Articles

Should I buy NVIDIA stock as a British investor?

NVIDIA stock is up two-thirds this year alone. Our writer considers some pros and cons, specifically given that he is…

Read more »

Investing Articles

With £2,000 in excess savings, I’d buy 41 shares in this Warren Buffett dividend stock

Stephen Wright thinks one of the best dividend shares to buy right now might be a Warren Buffett stock that’s…

Read more »

Investing Articles

How many Aviva shares do I need to collect a £100 monthly income?

Aviva shares are well suited for passive income purposes. Our writer works out how many would be needed for a…

Read more »