Many of you would have received your year-end bonus last month. Since you can’t travel freely, you may want to put the money to good use by investing this sum of money. But you may not have a good idea what to invest in or you may be torn about the numerous options you were presented with.
I am here to share what I think could do well in 2022 and hopefully it can help you decide better.
First of all, bonuses can vary in amounts, but I will just use S$10,000 as a ballpark figure. Also, I do not know your financial circumstances as well as what other investments you currently have. I am not a financial advisor so do not assume the following investments are suitable for you. I am sharing my opinions and they are not meant to be recommendations.
Let’s move on once you are aware of the risks.
2022 sees a major reset of valuations
The Fed has threatened to raise interest rates for the last 13 years but never really got to it because inflation hasn’t been a threat until Covid did us a favour to disrupt the supply chain. It became a catalyst for inflation to rise and the Fed has announced rate hikes to begin in 2022.
Why is this a big deal?
If you have been involved in the stock market for the past few years, you would have noticed that the US was easily the best performing stock market compared to the rest of the world. Zooming in deeper, you would have observed that the high growth tech stocks have been making a killing, doubling and tripling their share prices effortlessly. But it all changed since Nov 2021 where it was reported that four out of ten tech-heavy NASDAQ index stocks have crashed 50% or more.
On the contrary, energy and financial stocks were testing new highs and S&P 500 which is a broader-based index beat the NASDAQ performance in 2021.
These are the effects of rising interest rates. The high growth tech stocks’ values lie in the future and the discount factor isn’t large compared to today’s dollars. But it all changes in a higher interest rate environment as their future values will be worth much less today. On the other hand, traditional sectors such as energy, industrials, and materials benefit from rising prices (inflation).
Hence, the days of easy money and risk taking are over. There will be a major reset to the entire US stock valuations – down for tech and up for traditional sectors.
3 trade ideas for 2022
#1 Berkshire Hathaway
Warren Buffett remains one of the best investors today and Berkshire Hathaway is a traditionalist when it comes to stock selection. Buffett professed that he isn’t one who understands technology well and he has always stuck to what he knows.
Yes, one might argue he has an outsized position in Apple, representing 45% of Berkshire’s equity portfolio. But he said that he bought Apple not because of its technology or innovation prowess. It is because it has a very strong consumer branding. I agree because Apple is more of a consumer staple now where many people rely on its products and services on a daily basis. It is that sticky. And consumer staples are going to be resilient in an inflationary environment. Like it or not, you have to pay and use it.
Berkshire’s second largest exposure in its equity portfolio is Bank of America with 15% weightage. Banks have suffered from years of low interest rates and finally they have something to cheer about. One basic way for a bank to make money is to lend out deposits. With higher interest rates, banks have a bigger margin between the interest rate they give to depositors and charge the borrowers. Besides banks, this benefit applies to insurance companies which Berkshire has plenty of exposure to.
Third, Berkshire has its fully owned private companies within its organization such as Berkshire Energy and BNSF. It is no surprise that high inflation would benefit commodity companies and Berkshire Energy being involved in oil and gas is enjoying higher prices. BNSF is the largest freight railroad network in North America. It hauls bulk cargo which include commodities like coal. Again, rail benefits from rising prices.
Hence, Berkshire Hathaway is one of the most well-positioned portfolios for a higher interest rate and inflationary environment!
#2 MAMA
Next up we have the big tech companies. MAMA = Microsoft, Amazon, Meta, Alphabet. I dropped Apple because Berkshire would have given you the exposure.
These big tech companies dominate our daily lives and I see them as consumer staples rather than tech. They will be resilient to rising interest rates. Come on, is your company going to stop using Microsoft Office or Team if the subscription fees are raised? Same for Amazon Web Services and Google Cloud. Are you going to stop buying things from Amazon when stuff becomes more expensive? No, because it will be expensive everywhere else too! Are you going to stop watching YouTube or use Google search? I bet not. How about Facebook, Instagram and WhatsApp? No impact to usage even as rates or inflation rises.
The icing on the cake is that they are undervalued in my opinion. They are trading below their 5-year average PE ratios!
Hence, they would make good resilient investments in 2022.
#3 iShares MSCI China A ETF
This is not a stock but an ETF. Not in US but in China.
China has been beaten down over the past one year due to the ongoing regulatory pressure on the companies. No one knows when it would end and who would be targeted next. To some investors, China is ‘uninvestible’ but I think it is too early to write the world’s second largest economy off.
When it comes to investing in China, most investors would think of Alibaba and Tencent, the tech companies. But China is more than that. China is the factory of the world and they make almost everything that the world needs. That means that they have plenty of industrial and commodity companies which can benefit from rising prices.
Most of these companies are listed in either Shanghai or Shenzhen, collectively known as the A shares. iShares MSCI China A ETF would give you the exposure you want. Looking at the top holdings, we have Moutai (China’s national liquor), CATL (EV batteries), China Merchant Bank, Wuliangye (liquor) and Ping An Insurance. These are not your famous tech companies that were heavily regulated and are in better positions to benefit from inflation.
Stop focusing on China tech. China A shares might just give you a surprise in 2022!
How to buy them with just $10,000
Let’s say you are convinced about the potential of the above investments but here comes your next question, how much to invest in each of them considering the differing share prices? (as at time of writing)
- Berkshire Hathaway B shares US$320
- Microsoft US$302
- Amazon US$3,178
- Meta US$318
- Alphabet US$2,720
- iShares MSCI China A ETF US$42
Given that Amazon and Alphabet are priced in the thousands, wouldn’t your portfolio’s fate be in the hands of these two companies?
The good news is that you can spread the risk evenly if you use Syfe Trade. Yes, Syfe is widely known for their robo-advisory portfolios but they have now expanded their offerings to include stock trading services. You can use Syfe Trade to buy and sell US stocks and ETFs and it’s one of only two brokerages in Singapore that currently allows you to buy less than 1 share or what is known as fractional shares.
This means that you can spread your S$10,000 more evenly among these 6 securities with about $1,666 per counter. Even if your bonus is S$1,000, you can still buy S$166 worth for each counter! Now you have a new superpower – you are able to diversify your stocks even if you have a small capital!
Have a specific allocation in mind for these 6 securities? Syfe Trade’s fractional trading allows you to precisely split your S$10,000 to achieve your desired allocation. For example, you may want to have 50% of your portfolio in MAMA stocks and the rest evenly allocated between Berkshire Hathaway and iShares MSCI China A ETF. Without fractional shares, you would not be able to get that allocation.
Syfe Trade now offers 5 free trades each month and charges just US$0.99 per additional trade during the introductory offer period till 31 March 2022! Thereafter you’ll get 2 free trades each month and it will cost US$1.49 per trade from the third trade onwards.
Even after the introductory offer period, Syfe Trade’s fees are one of the lowest for the US market. There are no platform fees and no withdrawal fees or limits.
There’s also a cash credit of S$30 for funding S$1,000 and another S$30 when you make your first trade. You can earn more cash credits – which can be used to buy any US stock or ETF of your choice – when you refer friends. See the full details of their welcome promotion here.
I think that Syfe Trade is very suitable for investors with a lower amount of capital or investors who prefer regular investments in smaller amounts. No one can use the lack of capital as an excuse for not investing. Not anymore.
If you’re not already a Syfe customer, you can sign up for an account using the promo code DRWEALTH or via this link to enjoy an extra S$10 cash credit on top of the Syfe Trade launch promotion. Download the app and use Singpass for faster signup. If you already have a Syfe account, you can simply toggle to Syfe Trade to create a new profile and start trading.
Disclaimer: Not financial advice. All opinions are my own. References to specific security are meant to illustrate the concept of fractionalisation and neither intended nor to be construed as a recommendation or advice to buy any specific security. Please do your own research before making any investments at your own risk. Any form of investment carries risks and you should not interpret my returns as what you’ll get. This advertisement has not been reviewed by the Monetary Authority of Singapore. This article was written in collaboration with Syfe Pte. Ltd.