Mark Clubb, executive chairman of Team plc, a financial services group, considers what opportunities arise from the current turmoil created by war in Europe and other ‘red flags’. Cybersecurity is one of them, he says.
There are lots of “red flags” flying in these challenging times. Investors are concerned if not frightened about rising inflation, interest rates, war in Europe, and the possibility of the global economy entering a recession.
And I don’t see this volatility going away any time soon.
But is this a time to stop investing? Or counterintuitively are they ‘go!’ signals?
Whatever the decision, first we need to examine the impact these red flags are having on markets to then position our investment portfolios appropriately.
The impacts are:
- Energy prices (oil and gas) likely to remain high, prolonging inflation
- Food prices likely to remain higher
- Global supply chain blockages
- Continued labor market disruptions and wage inflation
- Heightened cyber risks.
- Growth in activist sponsored demands
Global recession
The “implications” are:
- Increased spending on defence.
- Increased controls on trade and further deglobalisation.
- Increased US repatriation of manufacture/assembly. “Made in America”.
- The above slows China economy and further contains China/US tensions.
- Increased cyber security legislation and business demands.
- Cryptocurrency regulation and much more aggressive oversight.
- Increase in gas and oil investment approvals.
- Likely increase in global investment flows into the US dollar (safer haven).
- More aggressive oversight and possible legislation for social media.
- China will rein back global territorial ambitions given global reaction to Ukraine
But the biggest implication is this: the much-increased likelihood of a global recession.
Recession causes pain. But for those that are prepared, times like these are potentially wealth-generators when looked at in the rearview mirror of time.
Action to take
Some actions to take: first, be exposed to oil, gas and broader commodities. We expect continued volatility in food and energy prices. At some point that will seep into the price of other goods and services.
So red flags for companies in fuel or oil intensive sectors (e.g., airlines, construction, plastics manufacturers).
The early 2000s recessions resulted in a 40% stock market collapse, while the 2008 financial crisis-induced recession torpedoed stocks by 50%. However, if there is a recession in 2022/23, and it is a “normal” recession, like the early 1980s and early 1990s, in which stocks dropped less than 20% then there is light.
The S&P 500 is already more than 10% off recent highs. Therefore, history says that even if we enter a recession, shares may only fall another 5% to 10% from current levels. That’s not much further downside, and it means that now may be the time to start buying into equities and that’s what many “insiders” are suddenly doing.
In total more than 30 corporate insiders have bought over $290 million worth of stock across 27 different growth companies I looked at recently.
We are also witnessing huge share buyback programmes being approved, increased and part executed. Recently Amazon, Applied Materials, Advanced Micro Devices, Cisco and Meta have all announced billion-dollar buyback programmes.
Just a reminder. After the Covid-19 stock market collapse of March 2020, there was a huge acceleration of insider buying in late March and early April which coincided with the bottom of that crash.
I would start with solid growth companies and companies benefitting from the “impacts” such as cyber security. According to Gartner, worldwide spending on cyber security has grown by circa 9% per year since 2014. Further, cybersecurity spending was just 3.5% of IT budgets in 2021. And cyber spending growth has consistently accelerated over the past few years, as the need for security solutions has become increasingly required. In 2021, it grew by more than 12%. It is expected to grow another 12% in 2022 – and this was before the Russian invasion.
In other words, this industry is just getting started and shares like industry leader Crowdstrike in the Team International Equity Fund have been down as much as 21% since the beginning of the year.
Maybe also some of the other leading technology companies like Alphabet and Microsoft or leading healthcare companies.
Yes, things could grow worse; however, these leaders are still going to be innovating, changing our world, and generating long-term wealth for their shareholders.
The last area I would recommend is dividends and income.
Dividends provide a “guaranteed” return that can supplement your income, act as a buffer against market volatility, and provide protection against inflation. It can also be cashflow to be invested at lower prices – the power of compounding or dividend reinvestment practice. However, it’s easy to lose sight of their importance during roaring bull markets. Dividends can provide a great boost to your returns when things are going well but they become absolutely critical for making money in shares when trouble sets in.
Just don’t make the mistake of “chasing high yields”. The key is to choose companies that pay sustainable growing dividends. When you add dividends to share buybacks in the S&P500 you get the following: S&P 500 Yield From Buybacks and Dividends = 3.45%.
This is looking more and more like an opportunity for investors with more than a two-year time horizon. You are being paid on average 3.45% for taking the risk in buying equities.
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