Adjust Your Investment Portfolio for Future Economic Outlook: Downgrade Stocks, Increase Debt Securities, and Invest in US Bonds

This is a good time to adjust your investment portfolio to the future economic outlook. downgrade of investment in stocks increase investment in debt instruments especially US bonds directly benefiting from interest rates going forward to increase the opportunity to generate returns for the investment portfolio

Since the start of the year, the S&P 500 has gained about 16% amid a slowing economy and expected liquidity in the system. While the bond side is becoming more attractive as the US 10-year bond yield has risen to the highest level in the past 13 years and is likely to slow down in the aftermath. This period is therefore an important moment for portfolio adjustment.

The S&P 500 index is currently hovering around 4,400 points, with an Fwd P/E of 19x, which is relatively high. Especially when considering the overall economic outlook that is likely to slow down in the future from the Manufacturing Purchasing Managers Index (ISM Manufacturing PMI) that is at a contraction level, with the latest ISM manufacturing PMI in the US in June. It came out at 46 (PMI above 50 is expansion), slowing from 46.9 in May.

In addition, liquidity in the second half of the year will be significantly reduced due to the new US government bond issuance. After expanding the debt ceiling at the beginning of the month Last Jun. The bonds issued are estimated to be worth $1.5 trillion. and if the US Federal Reserve’s QT measures are included allowing bonds to expire without buying them back with a value of up to 60 billion US dollars per month will make US bonds To be released to the public worth up to 1.8 trillion US dollars. The drop in liquidity, TISCO ESU estimates, will put 10% pressure on the stock market and will push the S&P500 down to trading at a Fwd PE of 17x.

In addition, if considering listed companies, it will be found that Only a handful of companies expect earnings to rise. And is an important part that pulls the S&P500 index up in the past. Most of these companies will benefit from the wave of AI technology, such as Microsoft, NVIDIA, AMAZON, Meta, Alphabet, Apple and Tesla, while most of the companies listed in the S&P500 have cut their earnings forecasts. The overall S&P500 earnings per share ratio is only 4.8%, meaning that at the current price level, the S&P500 has very low profitability.

Meanwhile, US 10-year bond yields are currently around 3.8-4%, which is an interesting point considering the trend in the future that bond yields are likely to decrease accordingly. The US Federal Reserve’s (Fed) policy rate is likely to maintain and cut as inflationary pressure continues to subside.

Normally, the price of bonds moves inversely with the yields of bonds. This means that if the bond yield goes down, the price of bonds will go up. And if considering the trend of US policy interest rates in the next 1 year, there is a chance that Bond Yield will decrease to 3.2% and with this level, investing in US bonds at the current level is expected to generate returns. up to 9%

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Figure: The 10-year US Treasury bond has a potential overall return of 9-16% over the next 12 months.

Source: TISCO Economic Strategy Unit (TISCO ESU)

Therefore, this is a good time to adjust your investment portfolio to match the economic outlook going forward. by reducing investment in stocks and increase investment in debt securities especially US bonds which benefit directly from interest rate trends in the period ahead to increase the opportunity to generate returns for the investment portfolio

If you have any concerns about your own financial planning You can send your questions to [email protected] I Article by Nattaporn Thorawongthawat AFPTTM Wealth Manager

2023-07-16 11:00:00
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