EKIP– Expert Club for Economics and Politics A Different Opinion
As a start to the latest column of the EKIP, in which we will present investment comments related to the financial markets, instead of reviewing 2017, I decided to look ahead to 2018. This is actually an old tradition on Wall Street - at the end of each year, large funds and banks present their forecasts for which investments will be the most profitable in the coming year. And therefore, following this tradition, in this article I pay attention to three investments that, in my opinion, will achieve very good returns in the coming year. And of course, following Taleb's iron "skin in the game" principle, I have put money in each of these investments. Let's see if we can beat Goldman Sachs.
1. Short US securities (government)
What happens when interest rates on a bond go up? The price goes down. This is a well-known relationship (which I can explain in more detail sometime, if there is interest). What has been the policy of the Federal Reserve (the US central bank) over the past year? To raise the so-called "base" interest rate, which, you guessed it, raises interest rates on US government securities (T-bills). And this leads to a decline in their prices. The Fed's policy is expected to continue in the same vein in 2018, which means that the prices of US government securities will continue to fall. Shorting US government securities is perhaps the safest investment of the ones included in this article for several reasons.
First, with this investment, if the Fed continues to tighten its monetary policy – you win. Second, even if the Fed stops the current pace of raising interest rates or freezes them completely (extremely unlikely), if economic growth in the US continues to accelerate (as is expected, especially given Trump's tax reform), you win again, because more and more investments will be transferred from safe government debt to riskier assets due to higher levels of optimism. This is actually the main reason why government securities are an increasingly less attractive investment. The more the state of the US economy and businesses improves, the less attractive government bonds are. Even when it comes to investing in relatively safe debt instruments, corporate bonds are more attractive due to their much higher returns.
And there is no sign of the Fed slowing down its monetary policy tightening at the moment. On the contrary, Yellen has made it clear that the central bank will continue to raise interest rates despite still-unsatisfactory inflation levels. The Fed has also begun to reduce its balance sheet, which is putting further downward pressure on government bond prices – a process that will intensify next year.
How to invest?
So far I have been talking about the so-called "shorting", but in fact my recommendation is not to try to short government securities in the same way as you would stocks. At least because it is more difficult, and anyway, especially for novice investors, direct shorting can be too risky (but that is a topic for another article). When it comes to government securities, I prefer options, and specifically when it comes to investing in falling prices - put options. Simply put, a put option is a contract that gives you the option, but not the obligation, to sell an asset within a certain period of time, at a certain price (for more information, see this article ).
2. Buy Greek stocks
Investing in Greek businesses? I must be crazy. After all, Greece is notorious for being the worst-performing economy in Europe and even the entire Western world over the past decade. Debt crisis, economic crisis, unprecedented levels of unemployment, political instability, protests, far-left and far-right parties fighting for power... Yes, all of this described the state of Greece until a few years ago... but now the situation is much different.
The country’s current economic situation is far from the stereotype of a country in permanent crisis that we are used to imagining. Yes, unemployment is still very high, but it is falling precipitously – from around 25% in the summer of 2015 to below 20% by the end of 2017. The country’s GDP has grown in three consecutive quarters this year for the first time since 2006. Official statistics show that both industrial production and retail sales have grown at their fastest and most stable rates since the start of the crisis in the past year. For the first time in perhaps 30 years, Greece’s state budget posted a surplus in 2016, and 2017 is expected to continue this trend.
There are all signs of a recovering economy, although earlier this year the Greek government agreed to an additional loan from the IMF. In fact, the trends in the country's economic situation are such that in the future, public debt will be less of a problem in Greece, no matter how fantastic it sounds. In 2018, the upturn will most likely strengthen even more - at least that is what the indications are so far. The state of the Eurozone as a whole is improving and so far there are no serious risks in the short term.
How to invest?
My choice is the Global X MSCI Greece ETF (GREK). The markets are actually already slowly taking into account the improved state of the Greek economy – the share price of the aforementioned fund, which is the largest on the US exchanges that invests in Greek companies. began to grow in April of this year. Since then, the share price of this fund has increased from about 7.9 to 10.3. This marks a return of over 30% in less than 9 months. This is a phenomenal result, and we are still only at the beginning of the recovery of the Greek economy.
If you are skeptical about the Greek economy as a sound investment, consider that it is precisely investments in economies that are just emerging from a severe crisis and entering a period of recovery that realize the highest returns, in the shortest period of time. Moreover, the very fact that for most people, investing in the Greek economy still seems like a crazy idea, despite the serious improvement in economic indicators over the past year, makes buying Greek stocks such a good move.
3. Uranium and companies that produce uranium
Uranium? You probably haven't even thought about this raw material. The hot topics in energy have traditionally been oil, these days natural gas, due to its lower carbon emissions, and, of course, all kinds of renewable energy sources. However, uranium is a very good investment precisely because it has been a neglected raw material in recent years. Earlier this year, the price of uranium fell to its lowest levels in the last 12 years. Over the past few months, the price movement has remained neutral - neither moving up nor down, but in my opinion, in 2018 it has the potential to explode into a very serious bull run. Why?
The world's largest uranium producers are coordinating their efforts to limit supply in order to reverse the downward trend. In November, one of the world's largest uranium producers, Cameco, announced that it would temporarily suspend operations at its largest mine. At the same time, Kazakhstan's Kazatoprom, another very large producer, also announced cuts in its production by about 20% over the next three years. When announcing the cuts, Cameco's CEO said bluntly that "it costs us less to buy uranium than to produce it."
As a result of the announced production cuts, market analysts have begun to predict a reversal in the price trend of the raw material. According to experts from the financial firm Cantor Fitzgerald (one of the most reputable in the world), the price of uranium is likely to reach a level of over $30 per 1 pound (a little less than 0.5 kg). For comparison, the price for the same amount is currently around $24. This is a potential growth of 25%, which is quite impressive.
How to invest?
The most direct way would be to trade futures with the raw material on the spot market. But my recommendation (as well as that of reputable investment advisors such as InvestingHaven) is the shares of Uranium Energy Corporation. This company is generally in the best position to profit from the rise in the price of uranium in 2018. The reason is simple - over the past few years, the company has accumulated a significant amount of uranium in its inventory with the idea of selling it when the price trend reverses. Which will immediately inflate the company's profits and will shoot its shares up. If you prefer not to put all your eggs in one basket, you can invest in the shares of the Global X Uranium ETF - a fund whose portfolio consists of investments in a variety of uranium producers around the world.
