- Seema Shah, chief global strategist at Principal Asset Management, shared her outlook with Insider for a new era of investing.
- With liquidity drying up and interest rates high, Shah said investors should decrease equity risk and pocket gains while the current stock rally is still going.
- She explained how to balance a portfolio to minimize the impact of inflation and maintain stable cash flow.
With the Fed committed to tighter monetary policy following a decade of near-zero interest rates, a new era of investing is dawning and investors will have to adopt a different strategy for 2023 and beyond, according to Seema Shah, chief global strategist at Principal Asset Management.
“This is a very different landscape than the one we saw before, and making those kinds of returns is going to be that much harder,” Shah told Insider. “Investors can’t just rest back on the actions they got used to over the last 10 years.”
Better positioning begins with reducing downside risk, she explained, and much of that can be traced to the equities market, which was one of the biggest beneficiaries of the easy-money era.
To Shah, equities will be one of the key losers moving forward, but the current stock rally presents a good time to pocket gains and exit positions before more headwinds hit, such as an earnings recession and broader economic downturn.
Diversifying for the new era with alternative assets
Looking ahead, Shah is watching bonds and the fixed-income space as safe corners of the market, given that yields are generating attractive returns relative to recent history.
And while Shah isn’t looking to specific stock names this year, she does like the healthcare, energy, and utilities sectors.
She expects inflation to continue decelerating this year, but doesn’t anticipate it falling to the Fed’s 2% target until next year. High prices point to a need for inflation-mitigation positions, like listed infrastructure, Shah said, referring to companies with long-term assets that provide essential services.
Historically, during periods of low economic growth and high inflation, listed infrastructure outperforms fixed income and equities, she said.
Meanwhile, Shah also likes commodities for the new era, as they are less susceptible to fluctuations in inflation.
“There’s always going to be volatility for a commodity. But if you’re looking over the longer term, the picture of commodities is strong simply because they’re finite resources,” she said.
Short-term investments in Chinese markets
Shah’s firm is positive on Chinese equities for the next six months because of the tailwind of China’s reopening and the release of pent-up demand.
However, beyond this year, the company’s optimism dampens due to geopolitical tensions and policy uncertainty.
“Typically, [geopolitics] are slow moving and the US and China are probably locked into it for a long time,” Shah said. “That is going to restrict growth on both sides, both for the U.S. and for China. I do think the geopolitical pressures are going to impact China’s equity market growth, their revenues, the strength of their companies. That’s more of a 2024 and beyond issue.”