“2015 was rich in headline-making events and brought a range of challenges for global financial markets. However, the events of the past year have opened up a number of new opportunities for investors, and now it is time to take advantage of them”, Jury Moskaliuk, an expert from Rietumu Asset Management (RAM), one of the leading Latvian asset management companies, thinks.
The published economic review of 2015 highlights that the first half of the last year gave investors positive results for a variety of assets, including investment-grade bonds and high-yield bonds, equities of developed and emerging markets, instruments of commodity markets. The correction that started in the second half of the year changed market trends. However, RAM’s specialists believe that there are enough options for successful investment in this situation as well.
The potential of junk bonds Experts also advise to look closer at high-yield bonds, emphasising that the potential yield of these securities is very high. “The difference between profits from high-yield corporate bonds and 10-Year Treasuries reached its maximum level recorded in the period of post-crisis of 2008. The premium for extra risk has significantly increased, and the current period has been one of the most attractive over the last 5-7 years to form an investment portfolio made up of speculative-grade bonds”, Jury Moskaliuk notes.
Alternative for government bonds and bank deposits At the same time, RAM’s specialists believe that the profitability of government bonds and bank deposits will remain limited despite the recent historical increase of the base rate by the U.S. Federal Reserve System. As it is noted in the review: “Despite the increase, the rate level is close to its historical lows. With current and projected inflation levels, which are considerably below the FRS comfort limit, further increase in the rate will most probably be smooth and gradual”. In such circumstances, it is recommended to look at high-quality corporate bonds, which will allow to get increased profitability and to distribute the risks among different issuers, industries and regions.
Successful entry in commodity markets Specialists highlight that 2015 was especially difficult for commodity markets, which continued their decline, resulting in a situation that prices of many primary commodities reached their twenty-year lows. However, the current situation provides excellent opportunities for successful entry in these markets. “Further recovery and subsequent growth of the global economy, population growth, urbanisation – all these trends stimulate high demand for raw materials in the foreseeable future. Taking into account the natural limits of primary commodities, the current period of low prices is attractive for investments in this market”, Yuri Moskaliuk believes.
Prospects of the US, the Euro area and Chinese markets Experts note the potential of US and Euro area economies – the strong domestic demand and the improvement of consumer and business activities here must secure the growth in securities. We also recommend to look at China, where the domestic consumption market is a prospective segment for investments.
Who will benefit from the monetary policy? The divergences between the leading global central banks in the monetary policy will have a strong influence on currency rates and international trade. Economists forecast a positive impact on the European equities amid these divergences, short-term USD denominated bonds expected to become an attractive asset class.
Risks and methods of their mitigation Growing credit risks, a slowdown of the global economy and geopolitical instability are named as the main “pitfalls” of financial markets in 2016. Taking into consideration these risk factors, RAM’s specialists recommend investors effective ways of protecting their investments: “Credit risks can be mitigated by investing part of assets into conservative financial instruments such as investment-grade bonds”, Yuri Moskaliuk says. – “As to the risk of an economic slowdown, it can be minimised by wide diversification among different geographical regions, economic sectors and classes of assets. Gold is a traditional asset protected from geopolitical risks, which can be obtained physically or through financial instruments, including shares of gold mining companies”.
It is noted that the liquidity in certain classes of assets will be negatively affected by new financial technologies and tightened regulatory requirements. Therefore, investors with a short investment horizon are advised to keep part of their funds in high-quality short-term assets. According to RAM’s experts, an unpredictable increase in inflation is also possible – shares of the commodity sector issuers can be used for protection.
RAM’s specialists have also offered their customers different types of investment portfolios based on forecasts and recommendations.
You can read the RAM’s review
here. Rietumu Asset Management (RAM) is part of Rietumu Bank, the leading private bank in Latvia. The company provides professional asset management services. RAM’s products and services are intended for a wide range of investors and are designed to meet the specific demands and needs of each customer. In the current market conditions, RAM’s specialists offer their customers the ability to reach an effective yield to risk ratio. DISCLAIMER: This overview (including any attachment (-s)) does not constitute a request, offer, recommendation or invitation of any kind to buy, sell or redeem any financial instruments or to conclude and/or to perform other transactions of any kind. The authors of the information presented in this overview, as well as JSC “Rietumu Asset Management" IMF, registered in the Commercial Register of Republic of Latvia on January 29, 2014, registration number 40103753360, legal address: 7 Vesetas Street, Riga, LV-1013, Latvia, hereinafter referred to as “RAM” , both together and individually, are not liable for possible use of the information presented in this overview, including any direct or indirect damages (including lost profits), as well as any penalties. Evaluations, opinions and forecasts presented in this overview are based solely on the RAM’s specialists' conclusions regarding financial instruments and issuers considered in this overview. While the information contained in this overview is obtained from sources believed to be reliable, the RAM does not guarantee its accuracy and completeness. Any of your investment decision should be fully based on your assessment of your personal financial circumstances and investment objectives. The RAM draws your attention to the fact that transactions in the securities and financial instruments market involve risk and require appropriate knowledge and experience.
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