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Buy, Hold, Sell, Hedge

Buy, Hold, Sell, Hedge

The Covid economic recovery saw a major rally across markets which let’s face it, provided perfect conditions to make money in the share market. What we face now is a much different landscape and investors need to be nimble in their approach to trading under these conditions. Here’s some tips on how:

Inflation is Unsettling Investors

As Andrew Baxter explains, the switch from quantitative easing to quantitative tightening has really stirred market volatility into a frenzy. The Federal Reserve is calling for more aggressive interest rate hikes, which could cause the market to be volatile until inflation stabilizes. Unlike the last eighteen months or so, it appears that investors will not be blessed with the ‘bottom left to top right’ and will instead have to work harder and smarter to find a way to be profitable in a tricky market.

Trading Volatility

Sometimes a market landscape demands some creativity when it comes to what we trade in order to make money. Host Andrew Baxter points out that in this environment instead of targeting traditional equities like individual stocks, we can target sectors or even phenomena within the market, namely volatility. The previously mentioned inflationary fears combined with the recent threat of war in Europe has created waves of volatility in the market, and we have seen the popular volatility instruments the VIX and VIXY indices jump and dip repeatedly in line with the major fluctuations in a very tradeable fashion.

Gaining Exposure in Oil and Energy

Different areas of the market hold up against inflation better than others. As Andrew and Mitch touched on in a recent podcast, the oil and energy sectors tend to perform better in times of inflation due to their price inelasticity. With the reopening of borders has come increased transport which uses – you guessed it – more oil and thus demand has increased while supply is constrained by OPEC. Although it is all very logical it can be tricky to get a form of exposure to the sector which is suitable for the humble retail investor. Andrew points out USO and VLE on the US share market while Mitch notes OOO on the ASX which are all tradeable in lieu of the terrifying futures market.

Tech Acquisition – the Good and the Bad

The recent dip in the tech sector has presented investors with an opportunity to get exposure to some major names at a discounted price. Within this sector however, host Andrew Baxter points out the process of commoditisation within the sector where some companies have cemented themselves with steady earnings and growth such as Amazon or Meta Platforms. He warns against some value plays like Netflix which is showing slow subscriber growth, and Peloton which is likely to lose a major part of its appeal once life returns to normal in a previously Covid-plagued world.

Positions to Hold in a Volatile Market

In the hold category, Andrew Baxter explains some of the specific positions currently in his portfolio which he intends to hold through this uncertain period in the share market. From  defensive standpoint, he points out that the business banking and utility sectors are safe havens, distinctly recognising CBA and NAB in Australia and the Southern Company in the US. These are some of the names with predictable and reliable earnings which can occupy a portion of your portfolio just to keep things ticking along with no real concerns as to how their bottom line may be affected by the rise in inflation. Management teams do not behave the same universally, however, so there are individual companies to avoid within steady sectors to avoid based on company-specific decisions.

The ‘Sells’

Host Andrew Baxter breaks down the types of businesses most affected by increases in interest rates and the reasons for this. When borrowing costs increase, businesses with tight budgets feel the pinch in their profits. In turn, some construction companies such as Cimic, operate in high volume with relatively short margins and can be something to get out of a portfolio before rates increase to avoid a large downturn before it happens.

Hedging Plays

As the saying goes – never have all of your eggs in one basket. Host Andrew Baxter discusses some simple tools we can use to hedge our portfolio against a potential downturn. We can mix in a range of short positions in the ETF space to protect against broader downside risk, while we can also consider using put options as a way of generating income through a tumultuous period. When considering multiple key economic factors, Andrew narrows down some possible selections to the SH ETF which is short on the S&P 500 while interestingly also raising the TBT ETF which tracks the price of Treasury bonds, a typical safe haven for concerned investors.

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