How To Ride The Wave Of Sustainable Finance Through Smart Investments?
Amidst beaten down global financial markets, New Zealanders continue to park their investments in sustainable sectors of the market. Notably, NZ has already passed the virus infection peak, and is now operating under the level-2 alert condition where businesses have ramped up their operations to harness early economic revival amid the pandemic.
The government’s elimination strategy has slowed the coronavirus curve resulting in ‘no widespread community transmission’ in New Zealand. This has been the primary reason for lockdown easing in the nation, boosting business activity levels and job opportunities for Kiwis through state-backed initiatives and the recent budget 2020.
As the nation moves over ‘Halfway down the Everest’, New Zealanders have increasingly shown interest in money management to secure a sustainable future in the times of such unprecedented crisis. So, keeping in mind the current wave of market turmoil, let’s have a look at some investment strategies that could turn a novice investor into a smart one.
1. Understanding Risk Tolerance and Diversification
Understanding the predicament of the current financial scenario and gauging the risk appetite at the backdrop of both psychological and monetary limits are the initial ladders to a successful investment plan. The present income, expenses, obligations, and responsibilities along with near-term and long-term objectives can be accessed for closely determining the level of risk tolerance. Post the evaluation, a dedicated budget can be planned with emergency funds set aside to build a portfolio.
The risk exposure can be capped via prudent investment in a diversified portfolio, incorporating variety of asset types and investment vehicles in the umbrella. Exposure to mutual funds and index funds, with some amount of investment in fixed income assets, can endow hedging against the volatility usually experienced in equities.
2. Evaluate Businesses for Sustainable Returns
Investment in businesses that market players do not understand tends to increase the exposure to potential losses. Clear understanding of the business nature and scope viz-a-viz industrial dynamics is important from a prudent investment perspective, while keeping an eye on possible structural changes can assist in accurate evaluation of businesses for sustainable investment in the prolonged run.
One can take cues from the famous quote by Warren Buffet-‘Never invest in a business you cannot understand’.
The legendary investor Warrant Buffet has set the investment theme around long-term investment in businesses one can relate with, that substantially provides a higher probability for portfolio growth while eliminating the risks driven by short-term fluctuations.
Exposure to long-term bonds and mutual funds, along with taking exposure in potentially attractive pockets of opportunities in equity space, can be some of the ways to start building sustainable returns in the right businesses.
3. Scanning Defensive Sectors
Unlike the cyclical or super sensitive sectors, defensive space is considered as a shining star for consistent stock performance and stable earnings. The consumer staples, healthcare, telecom and utilities can be looked at from the ‘defensive’ perspective, that are relatively safeguarded against the market turmoil, owing to steadiness in demand.
While market participants are keenly eyeing healthcare stocks amidst the coronavirus induced health and financial crisis, consumer staples recorded substantial traction amidst the lockdown regulations.
For instance- S&P/NZX All Consumer Staples Index has given nearly 23.40% return on a year-to-date basis as at 18 May 2020. Notably, The a2 Milk Company Limited (NZX: ATM) stock has appreciated by over 23% in the past one year.
While defensive investment strategy has yielded impressive results to market participants amidst the current volatile scenario, picking high-quality businesses is the key to sustainable returns, backed by mix of fundamental and technical approach.
4. Value Investments
Tapping lucrative price bargains at the right time may support substantial returns in the future. While the current volatile scenario has witnessed high-quality stocks trading at low levels, investors can analyse strength of balance sheets and sustainability of cash flows to evaluate intrinsic value of the stock. The calculated decision is highly crucial when the matter comes to conservative approach of the investors.
Given the global turmoil in financial markets, investors have immense opportunity to lock in their funds in undervalued stocks presently trading at bargain prices, which could eventually give substantial returns as the situation recuperates, however, right approach to fundamental analysis is important here.
5. Fixed Income Strategy
While a lower interest rate regime at the global level could wipe out savings in banks, current stock market volatility aggravated the need to have a consistent stream of income that can support the potential downturns. Judicious investment in dividend stocks, hereby, provides a strong opportunity for balancing the necessity of regular payments with the prospects for growth.
Stocks with feasible dividend yield could be chosen for building a stable portfolio. At the same time, financial ratios such as dividend pay-out ratio and interest coverage ratio can be used for ascertaining the sustainability of income and returns. For instance - S&P/NZX 50 High Dividend Index has risen by 10.47% on QTD basis as on 18 May 2020. Interestingly, two NZX-listed stocks Kathmandu Holdings (NZX: KMD) and NZ Windfarms (NZX: NWF) hold a gross dividend yield of over 15%.
While market players have been struggling to stay afloat and manage finances amidst the current volatile scenario, choosing right investment strategy in attractive themes while utilising effective financial tools plays an important role here.