“A lot of these issues that we face have a finite lifespan, and if you look beyond that the path of least resistance for the market is always up,” Puri said. A key reason? Negative real interest rates, that is, rates adjusted for inflation, “create a favorable environment for holding stocks,” he says.

While the yield on the 10-year U.S. Treasury bill has risen 17 basis points in recent days to 1.482% at Monday’s close, rates are still relatively low and the stock market, while expensive, is still showing strong growth. better risk-reward characteristics than other sectors, such as treasury bills or quality corporate bonds, Puri says.

“Finding a better alternative for the stock markets is quite difficult at this point,” he says.

Penta recently spoke with Puri about long-term opportunities and areas where investors should look for value in stocks.

“Structural forces” continue to support stocks

The reason stock markets are still worth investing despite already considerable growth is what Puri calls long-term positive structural forces “that have more sustenance” than limited concerns, such as debt difficulties. of the China Evergrande group, a major real estate developer.

Concerns about the implications of Evergrande’s inability to manage its debt burden helped the Dow Jones Industrial Average drop more than 600 points on Monday, September 20 – a drop that was erased on Friday, albeit on Tuesday. , stocks plunged again as the 10-year rate continued to rise.

The substantial structural forces Puri was referring to include the favorable macroeconomic environment created by low or even negative interest rates. Low rates mean investors should be much more comfortable owning stocks, he says.

As Puri explains, if investors worried about expensive stocks were to put all of their money in cash and treasury bills paying an interest rate of around 0.05%, it would take them 1,000 years or more to double. their money. In contrast, it would take seven and a half years for investors to double their money in stocks, given that stock markets have historically grown by 10% per year. Even a more conservative estimate of a 5% annual rise in stock returns would lead investors to double their stake in 14 and a half years.

“Compare 14 and a half to a millennial if you’re sitting in cash,” Puri says. “The alternatives to truly challenge high quality blue chip stocks are limited at this point.”

Another structural boost comes from governments in developed and emerging markets, which have stepped in by spending to counter the economic blows of the pandemic. Puri believes these actions indicate a long-term trend of increasing government spending as a percentage of GDP. In the United States, spending began with stimulus measures to mitigate the effects of the pandemic, and continues with expected spending on infrastructure – from roads and bridges to green technologies and “human infrastructure” such as child care and education expenses.

“This is a structural change underway that creates favorable prospects for companies sensitive to these expenses,” he says.

And, Puri notes, corporate profits continue to grow at double-digit levels. Even though earnings growth is expected to slow and the stock market may decline if earnings growth weakens, the overall earnings outlook and the ability of companies to pass on higher costs remains strong.

Of course, these forces do not mean that stock markets will continue to rise in the near term, as Tuesday’s market action shows. Bond yields are rising, the coronavirus pandemic remains a factor and could still derail growth, and Congress’ failure to tackle the debt ceiling could also be crippling.

“Any kind of disappointment [about] liquidity, better economic growth or a resurgence of Covid could derail this linear trajectory that we have seen in the stock market, ”said Puri.

Where to find value

Puri says he often advises investors to look at what they own. Many don’t realize how exposed they are to big names in tech, including

Amazon

or Alphabet, which dominate industries such as consumer discretionary businesses or communications services, for example.

Although the reopening of the economy has been delayed by the considerable setbacks caused by the Delta variant of Covid-19,

German Bank

expects the reopening to accelerate as vaccination rates rise and cyclical businesses, including banks and consumer discretionary companies, will benefit.

If investors are worried about inflation, Puri says they might consider investing in Treasury inflation-protection securities – bonds that adjust the principal payment according to inflation rates – or in bank loans which, due to their short-term nature (generally one year or less) have little exposure to interest rate risk and may generate slightly higher returns than on treasury bills.

A different approach to bonds

Generally, bonds serve two purposes in a diversified investment portfolio: they provide hedge when the stock markets slip and a return on the bond’s appreciation and coupon. In the past, the same security offered both, but “that’s no longer possible,” Puri says.

Investors can hold bonds for hedging purposes – without expecting much in terms of return – or they can hold bonds that generate a return (like emerging market bonds or high yield corporate bonds), although the latter behave more as risky assets, including stocks, than as a hedge.

“For most individual investors, you should have both,” Puri says. “A fixed income component just for hedging – when things aren’t going well, volatility rises and stock markets go down – and another part that provides you with income. ”

Stay invested in China

Regulatory control of China

Alibaba Group Holding Ltd
.

, the carpooling company

Didi Global
,

tutoring services such as New Oriental Education & Technology Group and indebted real estate developers such as Evergrande raise concerns about investing in China, but Puri is not advocating that investors avoid Chinese stocks.

In the short term, Deutsche Bank believes that for China in particular, and Asia in general, “it is too late to sell, but perhaps too early to buy,” given the potential for further volatility.

Longer term, although the outlook for Chinese growth is slightly weaker, it is important for investors whose return on investment is the main reason to “keep China in your portfolio,” he says.

Many large Chinese companies “are big and profitable to them, and are market leaders,” Puri said. “For a global investor, you have to keep your eyes open. If you are looking for ROI as the main motivation [for investing], leaving aside political and ideological views, then keep China in your wallet. “

In addition, regulatory crackdown has a lot to do with China’s desire for more visibility into how companies do business, its desire to reduce monopoly tendencies and promote Chinese family values. While the next few months could still be volatile, Deutsche Bank expects the upcoming re-election of Chinese President Xi Jinping next year to create a more favorable macroeconomic backdrop.

Yet, he notes, the country, despite its growth, is considered an emerging market. “It’s a stark reminder that there are non-specific security risks associated with these markets,” Puri said.