Rising inflation levels around the world have spurred market watchers to advise consumers that one of the best things to do now is to start investing. The way Ray Dalio of Bridgewater Associates sees it, “cash is not a safe investment”. “It is not a safe place because it will be taxed by inflation,” the founder of the world’s largest hedge fund explained in a Nov 30 interview with CNBC’s Squawk Box programme. He went on to say that it is critical for investors to have a safe and well-balanced portfolio to get through the turbulent times.
Dalio made the comments as the consumer price index (CPI) in the US hit 6.8% in November, up 0.8 percentage points from the month before. This is the highest the metric has reached in close to 40 years and is treble the 2% target set by the US Federal Reserve Board. Elsewhere, in China, factory-gate inflation hit a 26-year high in October after the producer price index came in at 13.5%. Singapore too saw its highest level of inflation in close to 8 years, as the overall price gauge jumped to 3.2% in October.
With inflation having been around for several quarters, Christopher Brankin, CEO of TD Ameritrade Singapore, does not consider it to be something transitory that will simply revert to the levels it was at previously. A key reason for this is that the increase in prices has been impacting “almost everything” from petrol and food to housing and automobiles. “At this point, inflation has already been impacting people’s pockets. So, I’m in the camp that it is here to stay for a period of time,” Brankin tells The Edge Singapore in a recent interview.
As concerning as this is, Brankin says there is some reason for cheer. For one, it is an indication of “some health behind the overall economy”. What he means is a pickup in inflation levels is typically a signal of stronger economic growth and, by extension, an increase in employment levels and wage growth. Through a domino effect, the stock markets in the US, Singapore and other countries, will benefit as companies may go on to attain better earnings.
Signs of this are already showing in the US, as the unemployment rate edged down by 0.4 percentage points to 4.2% in November. Even so, non-farm payrolls increased by 210,000, falling short of the 573,000 expected by Wall Street.
As the Fed looks to address rising inflation levels, Brankin echos Dalio’s stance that this is a good time to invest. For one, he points out that since 1926 or for close to 100 years, the standard inflation in the US has been around 2.9%. In contrast, the total gain for stocks has been around 10.3% in this time. “You may have all kinds of concerns out there — you have inflationary fears, a global supply and shipping crunch, a labour shortage. I don’t have a crystal ball, but I tell you, [based on the data] over the last 100-year period, the key is to be invested,” stresses Brankin.
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Opportunities galore
According to Brankin, the strong margins reported by companies in 3Q2021 is an indication that there are several opportunities in the US market for investors to tap. For one, around 82% of the companies in the S&P500 Index had beat street forecasts on earnings per share (EPS) while 75% of these companies had surpassed levels based on revenue. “These are very strong numbers, better than expected,” quips Brankin.
Looking back, he says that market watchers had pencilled in a 27% overall growth in earnings, just as companies started reporting their financials for 3Q2021. The growth rate went on to 40% by the end of the earnings season, amid positive EPS and revenue surprises from all sectors ranging from banking to technology.
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Overall, nine out of the 11 sectors captured in the S&P500 reported consistently higher numbers. The laggard was the telecommunications sector which Brankin says “was not able to keep pace” with the other sectors. Investors have already been capitalising on this with TD Ameritrade’s customers in Asia and the US being net buyers of stocks over the last 12 months.
While there are some overlaps in trading patterns of consumers from Asia and the US, there are differences too. For instance, TD Ameritrade’s Investor Movement Index (IMX) shows that Asian customers are seen to have a stronger appetite for tech counters like Sea Ltd, Apple Inc and Meta Platforms. The IMX is a proprietary, behaviour-based index, aggregating Main Street investor positions and activity to measure what investors were actually doing and how they were positioned in the markets.
One reason for the tech allure could be that investors in this region are more familiar with these counters, given that they are pretty much used on a daily basis. “Familiarity has helped with the overall growth of the mega tech stocks across the globe,” says Brankin, adding that his brokerage house espouses the importance of investing in companies that an investor knows of and understands the risk.
Other names that Asian consumers were picking up include British American Tobacco, Lockheed Martin Corporation and Square Inc. Meanwhile, they were seen selling units in counters like Pfizer, Exxon Mobil and Opendoor Technologies.
Trading derivatives
With several economies around the world grappling with elevated price levels, Brankin has been looking at inflation-resilient sectors like the bigger tech counters and companies in the energy and banking and finance sectors. The latter, for one, is slated to gain if rates edge up — a likely possibility since the benchmark 10- year US Treasury edged up to just below the 1.7% threshold in November.
Other opportunities Brankin is looking at lie in the derivatives space. “These allow you to take advantage of short-term market opportunities, without outlaying as much capital as you would if you were to go straight to buy or sell the stock. One such derivative is options — an instrument that offers buyers the right to buy or sell an underlying asset at an agreed-upon price date. A common perception among retail investors is that options are risky, says Brankin. However, he debunks this by saying they can actually be made less risky simply by “picking your probability”.
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Unlike stocks, which have a 50:50 probability of seeing an increase or decrease in price, options allow investors to choose the percent- age of their probability of profit. This involves using “theta” or better known as time decay, as the option approaches its expiration date. “This is something that market makers around the globe have done for decades. It is a power that has had me hooked for decades from the start of my career,” chuckles Brankin.
Aside from this, he encourages retail investors to look at futures. This instrument can be bought or sold at a pre-determined price, at a specific time, 24 hours a day for five days a week. With the greater time flexibility, investors have the choice to take advantage of short- term opportunities in real-time without having to wait until the equity markets are open. This can be hedging their portfolio to something a world leader says against a multitude of instruments like the S&P500, oil futures, silver and gold. For instance, an investor who is long on Singapore Telecommunications or United Overseas Bank in Singapore — can take advantage or protect their downside exposure to the counters if something happens in Asia at night — by potentially buying or selling e-minis on the S&P500 futures which trade all day.
Investing bug
As Brankin encourages consumers to start investing, he says he had started dabbling in the stock market at a very young age. “The investing bug kind of caught me early in life,” chuckles the 48-year-old. His interest was piqued after regular visits to the Chicago Board of Trade and the Chicago Mercantile Exchange during his school days. Here, he got acquainted with the importance of having a longer investment time frame so as to enjoy more potential for upside, in the longer term.
The excursions also had another effect on Brankin - they motivated him to pursue a career in the financial sector. His first job out of school was in the corn and corn options trading pit of the Chicago Board of Trade. This decision was well received by his parents who had always encouraged their sons to take on a career in banking and finance. Interestingly, neither parent came from the financial sector — his father was a plumber while his mother was a nurse.
Brankin’s elder brother would go on to work in the cryptocurrency space while his younger brother is doing — what he calls — broker, dealer type of trading. When asked if he and his brothers have thought of working together to launch their own trading company or investment platform, Brankin laughs. “I don’t know — it is a difficult concept because a lot is required from capital to meeting regulatory requirements,” he shrugs. He adds that it is also hard for smaller players to compete with the likes of TD Ameritrade and Charles Schwab (both of which are the same company) that have stronger market capitalisation, presence and by extension — an ability to offer more competitive rates to investors.
Brankin’s first forays into investing were “at a very young age” when he signed up for an individual trading account and a 401(k) retirement savings plan in the US. He has been building on this base by continuously adding capital to his portfolio. On what is his best investment, Brankin pauses and says it has been in his family. “I think that drives me. I saw my parents working super hard and they pushed us to go to the best schools we could go to. So it’s always been a part of my DNA to be able to work, provide and be there for my family,” he says emphatically.
Much has changed since Brankin got into investing. For one, one share used to cost US$80 for the minimum commission, which meant that the value of his share had to hit at least US$160 for him to break even. “You are never going to make money on that,” he quips. Brankin is now looking forward to the US exchanges allowing the purchase of fractional shares such that investors can buy any number of shares for a value they decide on. With such an option, he stresses that it is literally the best time ever to invest as a retail trader.
