Markets have been volatile of late, leading investors to wonder which corner of the market to seek refuge in. Despite a solid start to the year, all of the major Wall Street indexes have pulled back in February and are on pace for their second negative month in three. Investors are worrying that the U.S. Federal Reserve could keep rates higher for longer amid a renewed focus on hotter-than-expected inflation . Markets had rallied earlier on hopes that the Fed would pause its rate hikes. Higher rates for longer is expected to be bad news for growth stocks such as tech, which tumbled last year as the era of zero rates ended. So how should you invest during such times of uncertainty? Be selective The key is to “really look closely” at businesses and the themes that are the “most interesting,” such as cybersecurity and cloud development, according to Mark Hawtin, investment director at Zurich-based GAM Investments. “I think it’s really important to differentiate between what are the true disruptive growth businesses and which are not,” he added. Some Big Tech stocks are now “quite mature,” Hawtin said, noting that Alphabet and Facebook are essentially dependent on advertising. “With digital advertising now being a good 50% or 60% of global advertising. It’s much more susceptible to the economic vagaries and therefore if we see a downturn in the economy, a downturn in advertising, that has to have an impact on companies,” he said. Steve Eisman of “The Big Short” fame said Monday that gone are the days when investors could win by simply buying technology stocks. “I’m not saying you stop buying tech. I think you have to be selective, when you’re talking about companies … that have high revenue growth and have negative earnings,” he said. Balance growth versus profit In a lower- or zero-rate environment, many companies — particularly in tech — opted for a “growth at all costs” approach. But now, Hawtin urged investors to find companies “that offer a good balance of growth and profitability.” “Companies that are higher growth and therefore perhaps less profitable, perhaps even non-profitable, tend to fall very sharply in the early phases of a downturn or a change of view or a change in inflation expectations or interest rates,” he said. Mike Wilson, Morgan Stanley’s chief U.S. equity strategist, in a Feb. 27 note reiterated that the earnings recession is “far from over.” “Given we are about to enter the last calendar month of the quarter (March), we think the risk of earnings declining is high, and there is further downside for stocks,” he said, highlighting the trend that stocks often fall in the last month of a quarter as investors discount upcoming results. “Our advice is to take advantage of the fat pitch on earnings to lighten up on the more speculative stocks where earnings can’t justify current stock prices and continue to hold stocks where either earnings expectations have already been properly cut or discounted by a very attractive price,” Wilson concluded. Avoid the hype Finally, Hawtin said investors should “think for yourself.” “Try to essentially think for yourself and don’t get carried away with either hype, or necessarily share price action,” he said. “Just because the shares are up 30% in three days doesn’t necessarily mean it’s something to buy.” — CNBC’s Michael Bloom, Yun Li contributed to this report.
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