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'The tide has changed': This investing veteran says hot inflation and a tight Fed call for a shift in strategy. He likes 3 specific areas for protection

'The tide has changed': This investing veteran says hot inflation and a tight Fed call for a shift in strategy. He likes 3 specific areas for protection
'The tide has changed': This investing veteran says hot inflation and a tight Fed call for a shift in strategy. He likes 3 specific areas for protection

2022 continues to give growth stocks — particularly those in the tech sector — a blunt reality check.

The tech-centric Nasdaq index is down 24% year to date, more than double the 10% decline of the Dow over the same period.

MoneyWise recently interviewed investing veteran Claudio Chisani — investment advisor and portfolio manager at BlueShore Financial — for his advice on how to navigate the current environment.

According to Chisani, the investment climate today is very different compared to years in the past, where stocks welcomed the benefits of accommodating monetary policy and abundant liquidity. And that calls for a shift in strategies.

“The tide has changed,” he says. “Staring at an environment of high inflation and higher interest rates, an investor would be well served to be a bit more conservative.”

With that in mind, Chisani suggests several areas where investors can still find attractive opportunities.

Financials

Chisani says it would be wise to start focusing on conventional dividend-paying strategies, such as looking at financials and insurance companies.

“Those would be beneficiaries of higher rates as long as rates do not get out of control.”

Banks lend out money at higher rates than they borrow, pocketing the difference. When interest rates go up, the spread earned by banks widens.

But Chisani also warns investors to pay attention to the default rate at financial institutions. If rates are rising at a pace that’s beyond expectations and places pressure on consumers’ mortgage payments, it could hurt bank earnings.

These days, banks are generous dividend payers. Several large U.S. institutions — including JPMorgan Chase, Bank of America, Morgan Stanley and Goldman Sachs — raised their payouts in 2021.

Investors can gain access to the group through ETFs like the Financial Select Sector SPDR Fund (XLF).

Chisani says it might also be worthwhile looking at financial names north of the border. Manulife Financial (MFC), he points out, is a Canadian multinational insurance company that offers a generous annual dividend yield of 5.5%.

Real estate investment trusts

When it comes to fighting inflation, few assets work as well as real estate.

So it’s no surprise that in today’s environment — where consumers prices are rising at their fastest pace in 40 years — real estate is also on Chisani’s shortlist.

He suggests taking a serious look at real estate investment trusts, which are publicly-traded companies that own income-producing real estate.

REITs are great “cash flow mechanisms,” Chisani says.

REITs collect rent from the tenants and pay regular dividends to shareholders. And because rents are going up, investors of high-quality REITs can look forward to collecting a steadily growing stream of dividends.

Additionally, real estate typically appreciates in times of inflation, making the asset class a natural hedge against spiking price levels.

Buying shares in a publicly-traded REIT is just as easy as buying stocks. And if you don’t want to pick individual names, ETFs such as the Vanguard Real Estate ETF (VNQ) or the Schwab US REIT ETF (SCHH) provide convenient exposure to large baskets of REITs.

Commodities

Finally, Chisani points to metals, minerals and energy as proven ways to defend against the threat of rising interest rates. But he also highlights the fact that they have a different set of risks and rewards.

“When investing in metals and minerals, the risk associated with being in those sectors will be higher than conventional blue-chip dividend-paying stocks.”

The commodities market continues to be a volatile place. And for that reason, Chisani thinks ETFs represent the safest way for beginners to gain exposure to the space.

“I would use exchange-traded funds as diversified ways to participate in baskets and sectors of commodities,” Chisani says. “I think those could be quite lucrative down the path, and to a degree a great hedge against inflation in a client’s investment portfolio.”

Chisani singles out the SPDR S&P Metals & Mining ETF (XME) as an attractive inflation-fighter. He also says that Barrick Gold (GOLD), which pays regular dividends and raised its payout this year, could be worth a look for income investors.

For energy investors, Chisani suggests taking a look at Freehold Royalties (FRU), an Alberta-based oil and gas royalty company with assets in five provinces in Canada and eight states in the U.S. Freehold currently offers a dividend yield of 5.8%.

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This article provides information only and should not be construed as advice. It is provided without warranty of any kind.