How to invest in a safe and sound way in the second half of 2023

Key Takeaways

• With the current market volatility, one of the ways to invest with greater peace of mind is to think of the risk of an investment and compare it to the potential return.
• We can also look to diversification as a way to mitigate the impact of an unexpected development.
• Lastly, taking a longer-term view can help us to identify structural opportunities in the market

A volatile quarter to remember

If there’s a word to describe the financial markets in the first quarter of this year, it has to be ‘volatility’.

With inflation and interest rates remaining high, global economic growth has slowed down significantly. The Singapore economy grew by just 0.1% year-on-year in the first quarter of 2023, according to official government estimates.

Just in the past few months, we saw not one, but three bank failures in the US. The stress faced by US banks quickly spread to Europe, as investors became increasingly concerned about potential financial contagion.

The US Federal Reserve (Fed) persisted with its interest rate hikes through these developments, but economists’ views about its upcoming moves fluctuated with each major move in the market.

Amidst this volatile backdrop, global equities rebounded in the first quarter of 2023 as investors increasingly expect the Fed’s tightening to come to an end.

Citi shares how to invest in a safe and sound way

If such market fluctuations are causing you concern as an investor, do not worry! Like most others trying to navigate the financial markets, we wanted to hear what the investment advisors have to say about navigating the volatility.

We spent a weekday evening attending Citigold’s investment seminar. Here’s what we learnt from the event.

Read on for a sneak peek of the insights shared at this exclusive event for Citigold clients with Assets Under Management of S$250,000 and above.

1. Think about risk-reward

One of the ways to invest with greater peace of mind amid market volatility is to think about the risk and reward of an investment.

What this means is to weigh the potential gains of an investment against the potential losses.

If it has significant potential upside and limited potential downside, then we can say that the investment has a good risk-reward profile.

On the other hand, if an investment has a small potential upside but could cause you to lose all your capital, it would then not score well on this framework.

With this in mind, what decent risk-reward profile opportunities might there be?

During the seminar, panellists pointed toward investment opportunities in China.

They shared that China has progressed with a rapid re-opening in the first quarter after relaxing its Zero-Covid policy. This has translated into improved economic activity, especially in the manufacturing sector where business managers have a more confident outlook.

More importantly, the valuation of the Chinese market remains low compared to its historical average. We were reminded that even after a bounce in the MSCI China index, it is still significantly below its previous highs in 2021.

2. Think of ways to diversify

With the significant moves in the financial markets, diversification is one of the ways we can spread our risks across many baskets.

Diversification could help to mitigate the impact of an unexpected development.

On this note, In addition to investing in China, panellists at the Citigold event pointed to European stocks which remain overlooked by most investors.

One of the key factors driving the increased optimism was that the much-feared European energy crisis did not materialize, as Europe experienced its second warmest winter on record.

In addition, European stocks are cheaper than their global peers, improving on their cash generation profile, and many pay attractive dividends.

Across asset classes, we also learnt that ‘bonds are back’. Interest in fixed income instruments have revived in tandem with higher interest rates offered.

For example, the yield on the 2-year US government bond soared above 4% late last year, reaching the highest level since 2007.

3. Think long term

While there have been many developments in the financial markets over the past few months, we were reminded to think of our longer-term investment objectives and to look for related opportunities.

For example, while it is still uncertain when the Fed may start to cut interest rates, investors believe that it is only a matter of time before that happens. This is inferred from the comparatively lower 10-year government bond yield than the 1-year government bond yield as of March 2023.

The good news is that there are some indicators that inflation has already started to ease. For example, food and energy prices, which make up a sizeable portion of the inflation index, have moderated as oil prices fell from elevated levels after the Ukraine crisis.

Significant thematic shifts are also underway. For example, the shift towards clean energy sources has accelerated as governments have realized the importance of having a diversified energy mix in driving energy security.

In other words, going green is no longer just a Gen Z buzzword to save the earth, but an important consideration to ensure survival.

The key to a successful investment strategy is to be able to find opportunities to tap into these long-term structural trends.

What would Beansprout do?

It’s common for investors to be paralysed by fear and panic because of significant uncertainty in the market, just like what we saw in the previous quarter.

However, what we should be trying to learn is how we can invest in a safe and sound way to stay on track with our long-term financial plans.

The Citigold investment seminar shared several ways for us to do so.

By analysing the risk-reward of an investment, finding ways to diversify, and thinking long term, we can navigate the market volatility with more confidence.

If you are exploring investment opportunities, Citigold offers clients access to timely wealth insights on the latest market and industry developments through its global network of research analysts. Start your wealth journey with Citigold today.

This research is commissioned by Citi in collaboration with Beansprout, an MAS-licensed platform offering individuals simple financial guidance.

Gerald Wong, CFA, has more than 10 years of experience in the investment advisory industry, and is passionate about helping others make better investment decisions.

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