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According to Michael Arone, chief investment strategist for US SPDR funds at State Street Global Advisors, high-quality equities, lower credit risk and sectors that benefit from “tighter” inflation are three key themes for investors in today’s market. Inflation is likely to come down quickly but remain above comfort levels for Federal Reserve officials, Arone said on the sidelines of the Future Proof conference in Huntington Beach, Calif. Inflation in the service sector – mainly housing, housing and rent – is likely to persist for a while or decline less rapidly, even if other inflationary factors such as food, energy and groceries improve in the near future. “Investors will benefit from having inflation beneficiaries,” Arone said. Energy, materials, and global natural resource endowments are three sectors that have traditionally benefited, but even more so now, amid the transition from fossil fuels to alternative energy sources, which will accelerate long-term demand for metals, mining and natural resources, Arone said. He added that the Inflation Reduction Act, which President Biden signed into law in August, is likely to accelerate this shift. Investors can use the Energy Select Sector SPDR Fund (XLE), SPDR S&P Metals & Mining ETF (XME), and SPDR S&P Global Natural Resources ETF (GNR), Arone said. High-quality stocks are also well positioned, Arone said, as investors worry about a possible recession. The stock market usually rises before economic data hits the bottom as investors look for better days to come. Value stocks generally do well in the early stages of an economic recovery, Arone said. According to him, quality assessment is often in the eye of the beholder. Arone looks for value companies with “very healthy” balance sheets, stable earnings (i.e., low earnings volatility), dividend payers or those that increase their dividends (a sign of financial strength), and low debt-to-equity ratios. The SPDR S&P Dividend ETF (SDY) is a good indicator of quality value stocks, he says. Arone said fixed-income investors concerned about economic risk, and the volatility and returns issues it presents, should consider lowering credit risk and improving quality. Arone said he recommends switching to short-term Treasuries and high-quality investment-grade corporate bonds and moving away from more speculative corporate bonds. SPDR Portfolio Short Term Treasury ETF (SPTS) and SPDR Portfolio Short Term Corporate Bond ETF (SPSB) are ways to find these qualities in fixed income instruments, he says.
Credit: www.cnbc.com /