The best opportunities for today's market (plus an asset to hold for the next 5 years)

Everyone’s talking about recession and it’s making for some bleak BBQ conversations. Despite that, now is not the time to make rash decisions and it certainly isn’t the time to pull your money out of investments. Investors need to sit back and think long-term, rather than focus on a short-term cycle.

According to Jamie Hannah, Deputy Head of Investments and Capital Markets for VanEck Australia, there’s plenty of scope for investors looking to position their portfolio for now and the future.

For investors focused on defensive investing, Hannah argues that the old tried and true methods by and large can still work, such as gold, US Treasuries and floating-rate notes.

He believes investors should be fully invested across fixed income, equities and other asset classes.

“If you're going to stay with equities, it's really important that you focus on the right companies in this environment. I'm talking about companies that have a high return on equity, stable year-on-year earnings growth and low debt. 

If there is a pullback in the market in this environment, those types of companies will generally fall less than other companies and they'll bounce back faster when the market comes back,” he says.

In this edition of Expert Insights, Hannah shares his views on where most opportunities can be found for investors, the market outlook, along with his top pick for an investment to hold for the next 5 years.

Edited transcript:

What is your market outlook for the year ahead?

Economically speaking, the year ahead is probably a bit subdued. The fact of the environment we’re in right now, which is high inflation, rising interest rates, makes it a difficult period for governments to manoeuvre their policies and for central banks to continue to increase interest rates.

Everyone’s talking about whether we’re going to have a recession. Maybe. I would say the chances in the US are probably higher than Australia, but the fact is that rising interest rates in such a short period of time is going to put some pressure on the market. It’s not going to just lower inflation, it could cause a recession in our economies. The good news is that I would expect over the next year that interest rates will peak. That will obviously help anyone who has a mortgage or anyone with borrowing facilities as it will add a bit more certainty if we don’t see continued interest rate rises.

Is it worth having 100% of your portfolio in cash right now?

It's definitely not worth going 100% cash. You really don't want to miss upsides within markets because any investment is for the long term. So if you take, for example, people were saying at the start of this year that equity markets have hit a peak. It's been a very bad year. Economic conditions are not looking good. But if you look at what's happened since the start of this year, the NASDAQ's up 30%, S&P500 is up 15%. Anyone who sat on the sidelines over the last part of the year has really missed a big portion of a bounce back in the equity markets.

Which asset classes are you finding most opportunity in?

Looking defensively is really what some people are asking us at the moment. How do I position my portfolio for a defence against some of these economic headwinds, which are prevailing against their portfolios? 

There's no exact answer for this, but by and large, the old methods that have been around for decades are still some of the best defensive policies. That includes things like investing in physical gold. 

At the moment, the gold rate is around $US1,950 an ounce. It's been above $US2000 this year based on economic headwinds. When geopolitical risks come about, recessionary risks, anything like that will cause investors to move towards gold. Central banks are certainly buying gold from around the world based on the data. Gold is a very good defensive asset.

An alternative to gold is something like US Treasuries. 

US Treasuries, by and large, are the global risk-free return rate. Anyone who's doing any financial calculations or modelling needs a risk-free rate and US government bonds are a staple of that. They're not exactly completely risk-free, the government can default and that's obviously been in the news. The US economy is still the world's largest and it's still the backbone of the global economic system. Investing in US Treasuries is a defensive move and they're yielding around 5.2% at the moment. The interest rate rise has obviously helped US Treasuries.

Added to that, if you're looking to invest within the fixed income area, certainly short duration options, there’s not a lot of time to run variable rate coupons, so floating rate coupons. Over the past year as interest rate rises have come about, we've seen that, while you've got a fixed rate coupon, so you know what yield you're getting, the value of your capital has fallen on the back of those investments.

Investing in a floating rate interest in terms of a fixed income coupon or a bond means the rates are adjusted based on the underlying interest rates. As interest rates go up, you'll receiving higher income. And that's certainly been a benefit for investors over the past year.

Is there anything you think the market has overlooked?

There are certainly things that the market overlooks. 

I think in this current environment, a lot of people are looking for defensive assets, which means they're really trying to position their portfolio for the short-term cycle playing out at the moment. But short-term is not for anyone not coming up to retirement, anyone who's looking for long-term superannuation or any focus over 10 years. 

By the time you get to the end of this cycle, it's going to be less than 10 years. This short-term period is something that investors just need to focus on as being a short-term blip in what is otherwise a long-term cycle.

That means you should stay fully invested. And when I mean fully invested, it means you should have a good asset allocation between fixed income, between equities and other asset classes. Now, if you're going to stay with equities, it's really important that you focus on the right companies in this environment. I'm talking about companies that have a high return on equity, stable year-on-year earnings growth and low debt. If there is a pullback in the market in this environment, those types of companies will generally fall less than other companies and they'll bounce back faster when the market comes back.

What is your top pick for a defensive investment over the next five years?

I would say one of the best investments over the next five years, both defensively and as a long-term asset, is infrastructure. I think people are underinvested in infrastructure assets. Things like electricity companies, pipelines, railways, airports, toll roads. As much as everyone loves them, those types of assets can generally adjust their prices based on inflation.

A lot of the contracts these companies have, from electricity to toll roads and the like, are able to adjust. If CPI goes up 5%, they can adjust their prices by 5%. They're able to weather out any inflationary effects which are going to hang around for the next couple of years.

Second of all, a lot of governments around the world are really pumping big money into projects. We're talking about the US, Europe, and Australia. It's really a global spend. According to a local McKinsey report, the world needs to spend $US70 trillion between now and 2035 just to maintain our standard of living and to ensure that the infrastructure, which is the backbone of our society, continues. Investing in this area is obviously just going to continue to grow. And companies that are in infrastructure already are going to win new contracts. They are best placed to win these government contracts. They are best placed to deliver some of the growth in the infrastructure space.

The good thing about infrastructure assets is that they're not correlated to the rest of the market. They have quite a low correlation. As infrastructure does well over the next five years, you'd expect certain parts of the market that might not have done as well will offset some of that gain. 

They are a bit of a hedge and a bit of defensive play. Infrastructure also generally pays a pretty good yield. A global infrastructure investment you can get that through an ETF is probably one of the best low-key investments that portfolios can put into their portfolios at the moment.