Choosing between fixed-income and equity products is one of the investment decisions investors face in the second half of the year. Equities have performed better than expected in the first six months, despite the inevitable ups and downs and many uncertainties along the way. Ultimately, however, the period has ended with a positive balance for small and medium-sized investors, which is what it all comes down to.
In this regard, analysts at Renta 4 Banco are very clear in their preference, maintaining a strong preference for equities over fixed income in 2019. They see this investment strategy as having more attractive valuations within a scenario considered to be one of slowdown, but not recession. This is a factor frequently debated in financial markets and is what is prompting many investors to avoid taking positions in equities, fearing a significant stock market crash. So far, however, this has not materialized.
Furthermore, this major financial broker also points out that monetary policies will continue their gradual normalization throughout 2019. If this holds true, as is expected in the coming months, it would be a good opportunity to open positions in the stock market to generate returns on savings starting now. This is true beyond other technical considerations and perhaps also based on fundamental factors. Or at least it is a very relevant aspect that the financial markets are pricing in . Indeed, this fact encourages the purchase of highly selective equities, both domestic and international.
Economic cycle slowdown
In any case, the analysis department at Renta 4 Banco emphasizes that any investment strategy for 2019 must take into account the current global economic slowdown, even though activity levels remain reasonable. On the positive side, financial conditions are still favorable , but the main drag on growth, according to this financial analyst, is "high levels of global debt." This will be a key factor to consider in the coming days and months.
Regarding the perennial question of whether to allocate savings to fixed income or equities, they also have no doubts, maintaining a clear preference for the latter. This investment strategy could be favored as economic activity continues to support the growth of corporate earnings. According to this financial institution's estimates, these earnings could even reach single digits. In other words, in some cases, the stock market still offers potential for appreciation compared to current prices.
More problems in fixed income
Conversely, fixed income will no longer receive explicit support from central banks. This is a clear indication that a number of risks may arise if this seemingly more conservative or defensive strategy is ultimately chosen by small and medium-sized investors. Undoubtedly, significant losses are possible due to the current position of these financial assets. Indeed, investors currently invested in this segment could face unpleasant surprises at any moment.
It's no secret that, according to this study, equity investment remains more attractive these days, even in historical terms. With discounts ranging from 10% to 30 %, and a price-to-earnings ratio approaching that of 30 years ago. Furthermore, within the equity market, European equities are currently considered more advantageous than Spanish equities for small and medium-sized investors. This is evidenced by the fact that they have broken through some key support levels.
Increase in volatility
However, financial analysts also emphasize that expected returns on equities will not be free of volatility. This is something we have seen in the first six months of this year, with significant differences between their highest and lowest prices, in some cases exceeding 4% or 5% in their valuation in equity markets. This is one of the main risks for savers in this second half of the year, which is particularly concerning if monetary policies change on either side of the Atlantic, something that is currently being discussed in the stock markets.
On the other hand, we must also consider the many risks stemming from growth (pay attention to trade negotiations between the US and China) or political factors (Italy, Brexit, European elections, and the potential resurgence of the conflict in Ukraine, among other relevant events). In any case, this possible increase in volatility will generate long- term buying opportunities over the next year. In other words, business opportunities will certainly arise from this point forward. As is almost always the case in the complex world of finance.
Why buy fixed income?
Those who favor this type of investment strategy have positioned themselves as a more tranquil savings model until now. But this scenario could certainly change in the coming days or weeks, and the worst part is how these changes in risk perception might occur. Because, indeed, fixed income is ceasing to be the peaceful financial asset it once was. On the contrary, it could become a much riskier investment than equities or even alternative investment models.
Of course, another aspect to consider with fixed income is the low returns offered by its various financial products at the moment. It's very difficult to obtain interest higher than 3% or 4%, as you've likely seen in recent months, both this year and last. You even risk losing a significant amount of money along the way. This has been reflected in investment funds based on fixed income markets, with depreciation in their respective investment portfolios.
What is better to invest in now?
This is the million-dollar question many small and medium-sized investors are asking themselves given the current outlook for the financial sector. Well, everything seems to indicate that equity-based investment models will be the most viable. This is because achieving a higher return on savings will inevitably require taking on some risk. Furthermore, current expectations for equities are better than those for fixed income, at least regarding what will actually happen in the second half of the year, when the stock market is expected to generate more returns on savings in a way that is more satisfactory for savers.
It's also worth emphasizing that the technical outlook for equity markets isn't bad. Not at all. In fact, in some cases, they maintain a very well-defined upward trend , which can help small and medium-sized investors make the right decisions. However, this comes at the cost of taking on more risk in the trades they make in the coming days or weeks. It's also true that anything can happen due to the various issues currently affecting the stock markets.
Dividend yield
Furthermore, it's important to remember that the average return offered by stock dividends is very close to 5%. This is more generous than the interest rates of major fixed-income products and represents a fixed and guaranteed income every year, regardless of what happens in the equity markets. This is a factor that favors the stock market for more conservative or defensive investment profiles.
Because they have very relevant income that at the moment is not guaranteed by other financial products of any kind. In listed companies belonging to different sectors of business activity. From very moderate values ​​to others that are very aggressive but that in the end agree on this factor: they provide money to shareholders. With up to 8% interest rate.