Where to invest in a slowing economy?

As markets await the Federal Reserve's decision on whether to raise interest rates this Wednesday, investors wondering where to put their money in a slowing economy have a few options.

Market watchers believe unemployment will rise if the Federal Reserve keeps interest rates high for an extended period in a bid to curb inflation. Eventually, however, the central bank is expected to reverse or cut interest rates to boost economic growth.

“In a year interest rates will be lower, in two years even lower than today. While not going back to zero, they could go from 5.25% to 3% or even 2.5% over that period,” David Bailin, chief investment officer at Citi Global Wealth Investments, told Yahoo Finance.

Against this background, his team has presented opportunities for investors in a recent report.

Federal Reserve Chairman Jerome Powell delivers a news conference following the release of the Federal Reserve's interest rate decision May 3, 2023 in Washington, United States. REUTERS/Kevin Lamarque

interim loans

One way, he said, is to switch cash to intermediate-term securities.

“You want to switch from a current interest rate to an interest rate with, for example, a five-year maturity because it gives you two advantages. You can take advantage of the higher interest rate for the entire 5 years. And if interest rates actually go down, those bonds would actually appreciate in value,” he said.

Small and medium-sized businesses

When diversifying a portfolio, investors should pay attention to where valuations are cheapest, says Bailin. These include smaller or mid-sized companies whose stock performance is 30% below that of the larger ones.

“So why do you want to do this? Because these stocks are in a recovery phase [small and medium size] will be leaders and because they are undervalued than large caps,” he added.

Non-US Stocks

Citi Global Wealth Investments expects the US growth rate to be between 1% and 1.5% next year and the global growth rate at 2% to 2.5%, making stocks outside the US attractive.

“Growth outside the US will be greater, and our Federal Reserve will likely cut rates faster than European or other central banks.” If that's the case, you have two advantages: You get better growth outside the US combined with the falling dollar [which] means higher dollar returns.”

“We expect some emerging markets, including China and Brazil, to ease monetary policy in the coming year. Against the backdrop of US interest rate cuts next year, this should provide a boost to local markets and economies,” says the latest Citi report.

According to Bailin, Asian stocks in particular should benefit from this.

“If you buy a PanAsian index today, you're taking advantage of Asia's growth rate and the fact that this index is the most sensitive to a dollar's decline,” the strategist said.

Artificial intelligence

In terms of sectors, investors could consider companies that are becoming more efficient through the use of artificial intelligence.

“If you look at industries that have a lot of white-collar workers — low-level or mid-level workers, they're going to be heavily impacted by technology,” Bailin said.

“So you can invest in companies that could do a great job of improving their margins through this software development and software programming,” he added. Markets have responded positively to the AI ​​trend this year, prompting a rally in technology and communications services stocks.

biotechnology

Biotechnology stocks trade at a discount to pharmaceutical companies, in part because many are speculative companies that have a harder time raising capital.

“When growth returns, which is in 2024, we should see some biotech pick-up,” Bailin said.

Some economists are calling the US economic slowdown a rolling recession. That means parts of the economy, such as commercial real estate, are shrinking. However, other areas such as travel and leisure continue to grow.

A prolonged recession makes it harder to find the bottom of the market. Investors who have stood on the sidelines since the beginning of the year missed out on gains.

On Tuesday, the Nasdaq (^IXIC) and S&P 500 (^GSPC) both hit 52-week highs, up 25% and 16% year-to-date, respectively.

“No one would have predicted that markets would be where they are today,” Bailin said. “By waiting that amount of time, they are [investors] actually do without returns.”

Ines is Senior Economic Reporter for Yahoo Finance. Follow her on Twitter at @ines_ferre

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