The stock market has done well in the last month. The FTSE 100 is up around 1%, the FTSE 250 has gained 8%, and the S&P 500 is 7% higher.
This is good news for people who want to sell stocks and bad news for people who want to buy them. So where should investors be looking for bargains with share prices going higher?
Property
The real estate sector was one of the hardest-hit over the last 12 months. And I think it still has a lot to gain as interest rates stabilise and come back down over the next couple of years.
Real estate investment trusts (REITs) stand out to me at the moment. Names on my list include Primary Health Properties, Supermarket Income REIT, and Warehouse REIT.
Despite a recent lift in share prices, I think there are still stocks worth buying here. With dividend yields between 5% and 8%, these could be good passive income investments to make right now.
Investors will want to be careful about debt levels. REITs are required to pay out their rental income as dividends and this can mean they have to take on big loans to finance acquisitions.
Stabilising interest rates go some way towards offsetting this risk, though. And more expensive borrowing also increases rental demand, which is good for these businesses which stand to benefit.
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Defensives
Consumer defensive companies have also struggled this year as inflation has been putting pressure on margins. But with the rate of price increases slowing, I think there’s room for optimism.
This has been true on both sides of the Atlantic. And as a result, I think there are some interesting opportunities in US stocks like Kraft Heinz as well as Unilever and Diageo.
In general, these types of stocks are supposed to perform relatively well in economic downturns. But with markets moving higher this year, all three have underperformed.
The risk with these companies is that switching costs are low. And in an economic downturn, any of them might find that consumers look to trade down to cheaper alternatives.
Outlook
The general direction of the stock market is very difficult to call from here. The market seems optimistic, but if inflation and interest rates go the wrong way, things could deteriorate rapidly.
Over the long term, though, I’m much more positive. I think stocks will generally do well – this has always been true to date – so if I can hold my investments for years, things should work out okay.
Obviously, though, I’ll do better if I can buy shares at decent prices. And the best way of doing this is looking at areas that others are staying away from due to short-term headwinds.
To my mind, that means real estate and consumer defensives. Neither is guaranteed to work, but looking in sectors that others are avoiding gives me the best chance of finding long-term value.
