22 September 2018
Investing in tech stocks may be risky, so why not try traditional textile firms? Photo: CNSA
Investing in tech stocks may be risky, so why not try traditional textile firms? Photo: CNSA

How to invest under the new normal

I’ve grown tired of the endless discussion about when the Federal Reserve will raise interest rates, and of seeing news headlines with words like “global recession” and “crisis in emerging markets”.

I think many other investors feel the same way.

Now the buzzwords are “the new normal” and “buy stocks, not the market”.

Simply put, “the new normal” means that in the face of low inflation, low interest rate and low growth rate, investors need to search for new economic growth engines.

“Buy stocks, not the market” sounds a bit tricky. But the logic is simple — this is exactly Warren Buffett’s value investment strategy. It suggests that you buy a trustworthy company and hold it for the long term.

However, when the macroeconomic environment is bad or the market is bearish, how many investors are able to stick to their beliefs?

Under the new normal, investment return from those “platform” internet companies is extremely attractive for venture capital. Examples include Facebook, Twitter and, domestically, Alibaba.

As individual investors rarely have chance to participate in venture capital investments, I picked data on stocks in some sectors to show you why “buy stocks, not the market” and “the new normal” strategies work.

These sectors are: 1) Chinese and American internet stocks, which represent “the new normal”, 2) textiles and clothing firms and mainland auto companies, which are traditional industries, and 3) insurance stocks, which reflect the performance of large financial institutions and the market index.

Factoring in the share price changes and dividends received since 2008, the return of Chinese mainland internet and technology stocks is about 40 times, while that of US internet firms is about 10 times. It’s 16.7 times for textiles and clothing shares, and 14.6 times for mainland auto companies. During the same period, the return from insurance companies is only 3.3 times.

So in the end, as the market pundits say, “it’s always easy to filter the good stocks; what matters is whether you still hold them”.

Chinese and US internet and technology stocks have relatively high volatility, and individual investors are easily thrown into confusion by the market’s ups and downs.

Mainland auto stocks benefit from China’s growth miracle. However, they are mostly influenced by regulation and business cycle.

Most clients of textile and clothing firms are globally renowned brands with hundreds of thousands of employees and large production bases.

It’s not hard to identify prudent investments.

This article appeared in the Hong Kong Economic Journal on Oct. 15.

Translation by Myssie You

[Chinese version中文版]

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head of private banking and trust services at Hang Seng Bank

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