3 Index Funds To Buy On Hopes Of Global Economic Stimulus
Zacks Investment Research | Aug 20, 2019 10:36PM ET
Mutual fund investors could position themselves for gains ahead as economic stimulus measures are likely to be taken to deal with the global slowdown. This slowdown has been mostly brought upon by the ongoing U.S.-China trade dispute, a weak manufacturing activity in Europe, Brexit and weakness in emerging markets.
However, fresh hopes arise now that major economies have come forward to boost economic activity in their respective regions, which in turn could help the bourses end in the green. Therefore this could be the right time to invest in index funds since these funds mimic the performance of a given index.
ECB Could Cut Rates
The European Central Bank (ECB) could slash interest rates in its September meeting, shortly after President Mario Draghi’s term ends. In ECB’s July meeting in Frankfurt, Draghi emphasized that the main refinancing rate and the deposit rate would be sustained at their current levels of zero and 0.4% respectively.
However, he did mention that such rates could be lower through the first half of 2020. He added that these rates would remain so “for as long as necessary to ensure the continued sustained convergence of inflation to our aim over the medium term.”
Germany to Spend $55 Billion to Push its Economy
After Germany’s gross domestic product shrank 0.1% in Q2 of 2019, Germany’s Finance Minister Olaf Scholz said on Aug 18 that the government could inject $55 billion into the economy in a bid to stimulate it.
Germany, which is an export-focused economy, faced a major slowdown in domestic manufacturing and exports because of Brexit and the U.S.-China trade war. Decline in GDP, by the way, could lead Germany to a recession this year. This is where the proposed $55 billion comes in to combat the economic slowdown.
China Joins the Rate Cut Club
As central banks worldwide are contemplating lower interest rates, the People's Bank of China has also decided to go down the same road. Since the Chinese central bank uses multiple ways to control the flow of money and interest rates in China, it has decided to improvise the loan prime rate (LPR), which is the rate that banks charge their most loyal customers.
Last week, Beijing announced that the LPR will undergo a few changes, which are aimed at boosting the economy. First, commercial lenders will be urged to use the LPR to price new loans. Secondly, 18 financial institutions can now submit LPR quotations (10 earlier). Lastly, the loan prime rate will be set on the 20th of every month, instead of on a daily basis.
This new strategy will help lower interest rates in China.
U.S. Tax Cuts and a Fed Rate Cut Might be Imminent
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President Donald Trump has also proposed a set of economic stimulus to boost the U.S. economy. On Aug 20, Trump said that he was considering reductions in capital gains’ taxes as well as payroll taxes. The latter could bring more relief to the middle class, since payroll taxes are used to fund Medicare and Social Security. This could benefit the U.S. middle class immensely.
Trump also called on the central bank to implement a full percentage point rate cut later this year. If these measures indeed go through, Wall Street could witness decent gains ahead.
3 Best Fund Choices
We have, therefore, selected three index funds that carry a Zacks Mutual Fund Rank #1 (Strong Buy) or 2 (Buy). Moreover, these funds have encouraging year-to-date return. Additionally, the minimum initial investment is within $5,000.
We expect these funds to outperform their peers in the future. Remember, the goal of the Zacks Mutual Fund Rank is to guide investors to identify potential winners and losers. Unlike most of the fund-rating systems, the Zacks Mutual Fund Rank is not just focused on past performance, but also on the likely future success of the fund.
The question here is: why should investors consider mutual funds? Reduced transaction costs and diversification of portfolio without several commission charges that are associated with stock purchases are primarily why one should be parking money in mutual funds (read more: Zacks Investment Research
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