Investing is a long term journey and within that there are several pit-stops where one may pause and have a close look at the portfolio. There could have been new developments in the recent past which may shape up the future in a new light altogether. Currently, the stock markets are at an all-time highs and the valuation of some stocks makes them expensive as well. The potential for the equity markets to go higher still exists but investors need to exercise a bit more caution. So, at the 2021 mid-point, many investors are looking for answers to keep their portfolio returns on the same track in light of the recent developments, especially on the front of inflation, yields and dollar strength.
UBS Chief Investment Office addresses a few questions at the forefront of investors’ minds at the mid-point of 2021. Of the many investor concerns, two key ones are:
- Where can I still find short-term portfolio growth?
- How can I protect against downside risks?
UBS CIO in their updates says , “Global equity markets are now 24% above pre-pandemic levels, leading some investors to wonder if upside may be limited from here. However, we think equity indexes can move higher, driven by a combination of robust earnings growth, still-attractive valuations relative to bonds, and accommodative central banks.”
One of the primary factors that make stocks rally is the earnings growth. Some thoughts of UBS CIO on the corporate earnings-The rally is underpinned by very strong earnings growth, which has continued to beat expectations over the first half of this year. We now expect S&P 500 earnings to be 30% above pre-pandemic levels in 2022. We also think there is more upside to come in stocks that are more heavily exposed to economic reopening.
Should one book profits: But, the million dollar question remains whether to lock-in profits or to wait before committing more money into stocks? UBS CIO says, “As equity markets have rallied to record highs, some investors are beginning to focus more on potential downside risks, including coronavirus mutations, inflation, and geopolitics. They’re considering whether it’s time to lock in profit, or to wait before committing more capital.
Overall, we do not think the downside risks we face today are higher than average. In our base case, we do not expect them to topple the rally, and long-term investors should generally not try to time the market, in our view. Waiting for risks to subside can be an indefinite and costly process, and investing at all-time highs has historically not proven to be riskier than investing during other periods.
At the same time, investors should regularly review if equity market gains mean they are now taking excessive portfolio risk. If so, they should consider ways to reduce some of that risk, while keeping long-term plans on track. This can be done by locking in gains on stocks that have outperformed and now have limited upside, or by seeking greater downside protection via hedge funds, options, and structures. Diversifying into select defensive stocks is another option to consider.”