Factors to consider when investing for capital growth

Investing in the stock market is not an easy task, especially for unexperienced investors. In fact, it is very common for investors to feel hesitant to invest in capital growth assets or products since there are plenty of factors you need to consider and evaluate in addition to the higher volatility which such investments tend to exhibit compared to safer alternatives. The one-million-dollar question investors ask is, how can I determine the right price to pay or the best price to sell an investment? This question is harder to answer in times of high market volatility. The obvious answer would be to buy below the future market price. Of course, no one knows what the future has in store, so timing the market is no easy feat.

Buying into financial assets that offer the potential of capital growth depends on the risk tolerance and needs of the individual. Equities and equity-linked investments are usually associated with higher risk investments but also with more potential for capital growth. At some point in time, during the investment period, it is likely that an equity investor will experience a market sell-off. Equity investors must not cash out with every pick-up in market volatility, but they should keep in mind from the outset that future potential gains do not come risk-free.

One can easily have a look at the statistics section when browsing through equity-linked investment options in order to understand better what type of growth investment best suits his investment objectives. One measure which investors consider is the beta statistic. This measures the volatility of an investment fund or equity during a particular time period compared to the total market or benchmark. If the beta figure of a particular fund or company is greater than one, it means that the investment is highly volatile and will move in the same direction of the market. Alternatively, if beta is less than one but positive, the price would still move in the same direction with the market but the investment is also expected to be less volatile than the market. A negative beta means that the security is not correlated with the market and its price will move in the opposite direction.

Another figure equity investors will consider is the dividend rate. Undeniably, this is another factor that investors need to keep an eye on. A dividend is the distribution of part of the company’s earnings to its shareholders. If such dividends are paid regularly and moderately, it normally gives an indication that the company has a degree of stability and steady growth. At the same time, one has to watch out for companies paying high dividends, as this could signal that the company is not investing enough in itself. Recently, due to COVID-19, we have experienced an exceptional scenario where we have seen local and international companies postponing or cancelling their dividends. Equity investors should keep in mind that companies have full discretion whether or not to declare a dividend. In Europe, the European Central Bank has earlier this year asked banks not to pay dividends until at least October 2020. Locally Bank of Valletta plc has postponed its dividend in respect of the year ended December 31, 2019, GO plc revised its dividend lower and Malta international Airport plc cancelled its dividend altogether. Such prudent measures were taken in order to safeguard the long term interest of businesses, investors and stakeholders.

These will lead us to consider an appropriate mix of assets when investing in equities, both from a geographic and sector point of view. Investing in a diversified equity portfolio can lead to higher returns with a lower risk exposures. It is important to see how the industry is represented in the market and whether it has an advantage to stand out given the current market conditions. We have clearly seen this scenario during the recent months where technology, consumer cyclicals and healthcare where the three sectors which enjoyed a speedy recovery. On the other hand, the financial sector and the energy sector where among the hardest hit.

From a geographical point of view, against all odds, we can see China which has outperformed developed market equities. As at the time of writing, the US market is slightly positive on a year-to-date basis. On the contrary the UK and European markets have still a long way to go to reach the highest year-to-date price, reached earlier this year, due to the uncertainty being caused by Brexit in addition to the economic hit caused by the corona virus.

For investors looking for capital growth, choosing the right products that fit their needs and objectives is not an easy task and less experienced investors might end up losing money if they do not withstand volatility or try timing the market. It is important to emphasise that it takes a certain level of skill, knowledge and experience to successfully manage a portfolio of equity-linked investments. In difficult economic and market circumstances, it is highly recommended that investors seek investment advice to analyse their risk tolerance, needs and objectives and identify what portion in equity-linked assets your portfolio should have.

Matthew Magro, B.Com (Hons) Banking & Finance is an Investment Advisor at Jesmond Mizzi Financial Advisors Limited. This article does not intend to give investment advice and the contents therein should not be construed as such. The Company is licensed to conduct investment services by the MFSA and is a Member of the Malta Stock Exchange and a member of the Atlas Group. The directors or related parties, including the company, and their clients are likely to have an interest in securities mentioned in this article. Investors should remember that past performance is no guide to future performance and that the value of investments may go down as well as up. For further information contact Jesmond Mizzi Financial Advisors Limited of 67, Level 3, South Street, Valletta, on Tel: 2122 4410, or email [email protected]