Changing Portfolios for Macro Economy Changes
There’s a new world economic order brewing, and it’s time that investors recognized the impact that these macro changes could have on their portfolios. And we’re not just talking about impending interest rate hikes in the US. These changes include:
- Growing “nationalistic” sentiment in Europe and parts of South America
- Brewing geo-political tensions in the Middle East
- Potential resurgence in the commodity trades, of which Emerging economies will be prime beneficiaries
All these, and others, like military muscle-flexing in hotspots like Africa and South China, the final face of Brexit, and a desire to renegotiate decades-long trade deals, will definitely have a domino impact on your portfolios.
Re-positioning For Change
The sooner that portfolio managers and investors realize the potential for impact, the better they will be able to position their portfolios to brace for these changes. So, what type of changes are we talking about? Here are some ideas to consider:
If you are like most U.S investors, your portfolios will likely be filled with what’s normally called “home bias” – which means you’ll be overweight U.S stocks. If some/all of the above macro changes were to transpire, a U.S-only portfolio will be hit hard. Think about investing outside the U.S – perhaps in Emerging Markets or Europe
2) The Commodity Trade
If, as is predicted, inflation does raise its head in the U.S (and its key trading partners like Canada, Mexico, China or the UK), then that’ll put pressure on the Greenback. In such a scenario, having your portfolio exposed to some commodity risk might not be such a bad idea.
3) Think Capital Investment
Whenever an economy (regardless of whether it’s the U.S, China or Germany) comes under pressure, the first thing that governments and private corporations do is make capital investments into their economies and their sectors. That’s because investment in capital-intensive projects, like infrastructure, energy and technology, becomes more cost-effective and attractive.
4) Do Some Bonding
Don’t forget the cash component of your portfolios. A rising interest rate environment offers some opportunity for your cash to earn some returns and buoy your overall portfolio performance. The most recent (March 21st) interest rate hike presents a good opportunity to build half-a-position in 5 to 10-year bonds, and then go to a fuller position at the next rate hike.
Tools of The Trade
While you will likely not be able to hedge your portfolios against ALL of the (potential) macro headwinds discussed above, you could brace yourself to deal with some of them immediately. Additionally, it’s highly unlikely that you’ll be able to shock-proof your portfolios using a single investment vehicle.
Here are some tools at your disposal:
a) The Euro Play ETF (FEZ)
If it’s Europe that you have set your sights to, then the SPDR DJ Euro STOXX 50 ETF (FEZ) is a great one-stop play.
Offering a (current) yield of 2.43% at a Net Expense Ratio of just 0.29% (the category average ER is 0.44%), this ETF offers you exposure to some of the largest names across the 19 EURO STOXX Supersector Indexes. And with a 1-year gain of 9.21% to boast so far, this product is a pretty good one to add to your portfolios now.
b) Commodity Play ETF (DBC)
If you are interested in a 1-stop Commodity play, then you can’t get any better than PowerShares DB Commodity Index Tracking Fund (DBC).
With just a single holding, you’ll instantaneously get exposure to a broad array of global commodities, including Heating Oil, Light Sweet Crude Oil (WTI), Nat Gas, Gasoline, Aluminum, Silver, Zinc, Wheat, Sugar, Soybeans…and that King of Commodities – Gold!
Although this one has a high Expense Ratio (0.89%) than many of its peers, it’s almost 14% 1-year return makes that price worth p