Times of adversity invariably offer up opportunities.
Markets are never the dispassionate creatures of cold rationality that economic theory calls for. They over-react on the upside, they over-react on the downside. As Warren Buffett observes, in the short term they are very much voting machines: it is only in the long run that they are weighing machines.
And so, as I’ve said before, the canny investor welcomes these opportunities. Quite simply, adroitly sieving the bargains from the bear traps can deliver a powerful boost to your wealth.
And clearly, there are opportunities swirling around the markets right now.
Interest rate reversal
As I said a few weeks ago, bond and gilt markets are one such potential opportunity for investors to mull over.
(‘Bonds’ are corporate bonds: corporate debt, in other words. ‘Gilts’ and ‘Treasuries’ are the same thing, but issued by governments — in this case, the British and American governments respectively.)
Interest rates have rocketed upwards, as central bankers have responded to soaring price inflation.
But higher rates of inflation depress bond and gilt prices, and so do rising interest rates. And falling bond prices translate into higher bond and gilt yields.
The opportunity? As interest rates fall in response to falling inflation, bond and gilt markets should correct, with prices rising — potentially quite markedly.
Bricks and mortar
Property and infrastructure is another potential opportunity — and again, what’s been happening with interest rates has been a significant causal factor, often exacerbated by Covid-19 and the working-from-home phenomenon.
Yes, some property companies’ prices are beaten down and likely to stay that way for quite some time: right now, a landlord owning office blocks and tired shopping centres doesn’t have a lot of appeal for investors.
But that isn’t true of all property and infrastructure companies. Those owning decent assets should be secure long-term bets and attractive income plays — and many of these companies have been caught up in the same contagion. Put another way, whereas these decent businesses formerly traded on hefty premiums, they’re now trading on equally hefty discounts.
What counts as ‘decent’, exactly? I especially like operators of distinctive assets: quality infrastructure businesses, owners of huge warehouses located on major transport routes, owners of doctors’ surgeries and student accommodation — that sort of thing.
Such businesses may well be structured as real estate investment trusts (REITs — a corporate structure that offers investors some tax advantages), but equally, some aren’t.
Throwing a few names out, I’d suggest that you begin by researching Tritax Big Box, Primary Health Properties, HICL Infrastructure, Empiric Student Property, Custodian Property Income REIT, and LXi REIT. But there are plenty of others.
Nor is this all
And of course, these aren’t the only opportunities thrown up by the economic and political turbulence of the last few years — they’re simply two that seem reasonably compelling, and reasonably attractive, to me at the moment.
Solar energy companies also seems a touch oversold, to me. And the Financial Times, I note, is pointing out that US bank stocks have sunk to an all-time low against the S&P 500 index of leading American shares.
Likewise, one can’t help but wonder about opportunities in retail: if once-moribund Marks & Spencer can rise 106% in a year in which consumers are experiencing a cost-of-living crisis, what other retail shares might experience stellar recoveries? Tesco, anyone?
That said, cautious — or sceptical — investors might well argue that the safest retail play at the moment could be another REIT: Supermarket Income REIT, in which I also have a modest holding as a retirement income play. The business, in case you haven’t guessed, owns a clutch of supermarket freeholds, and leases them to retail majors such as Tesco, Marks & Spencer, Waitrose, Morrisons, and Asda.
What should you do? Should you, in fact, do anything at all? That’s entirely up to you: I’m simply pointing out things you might like to think about, and research further.
The real point is this: adversity, as I’ve said, brings opportunities in its wake. For every cloud, there is a silver lining. In short, one doesn’t have to wait for the once-in-a-generation disruptions brought to mind by Sir John Templeton’s famous maxim (“Buy when there’s blood in the streets”).
Because even the merest glance at the daily news right now points to no shortage of adversity ahead — and therefore, potential opportunities.