Volatility is on the rise in equity markets around the world, sparking fears amongst investors about what could happen next.
While most of the world is experiencing subdued levels of growth with central banks cutting interest rates left, right and centre, the United States is headed in the opposite direction. In fact, recent jobs data to emerge from the world's largest economy suggests that interest rates are likely to increase in the near future. This is having a dramatic effect on foreign exchange markets and is sending ripples through equity markets, too.
Unfortunately for Australian investors, the S&P/ASX 200 (Index: ^AXJO) (ASX: XJO) hasn't been able to avoid that volatility having fallen nearly 3% since its recent seven-year high. With business confidence remaining low and unemployment on the rise, investors need to be prepared for that volatility to continue.
As scary as volatility can be, it is important to remember that it is a perfectly normal part of investing, and is by no means a reason to exit the share market. To help you become more prepared, here are three stocks I would suggest avoiding, along with three stocks I believe you should buy right now.
Avoid these stocks
- BHP Billiton Limited (ASX: BHP). Although the diversified miner is trading well below its recent highs, the stock remains risky given its leverage to commodity prices. Iron ore and oil prices are tipped to fall considerably further before levelling out, which would likely spell more pain for BHP's shareholders.
- Commonwealth Bank of Australia (ASX: CBA). Although some investors believe there is more juice to be squeezed from Australia's biggest bank stock, it is overpriced and is by no means a good buy. The bank could suffer as a result of the struggling local economy as well as tougher regulations.
- Medibank Private Ltd (ASX: MPL). The recently-listed health insurer has retreated from its all-time high but remains an expensive stock. A huge amount of hype appears to have been priced into the shares and at $2.42, the stock demands too high a premium to warrant buying just yet.
Buy these stocks
- Woolworths Limited (ASX: WOW). The supermarket behemoth's shares have been hammered recently, giving long-term investors an incredible opportunity to buy a high-quality and high-yield dividend stock. In addition, it maintains a defensive earnings stream in that people will always need to buy food, even if the economy does take a turn for the worse.
- Coca-Cola Amatil Ltd (ASX: CCL). The beverage manufacturer has had a tough two years but management appears to be making the right moves to turn the ship around. At $10.67, there is plenty of upside potential for Coca-Cola Amatil's shares.
- Japara Healthcare Ltd (ASX: JHC). Most healthcare companies enjoy defensive earnings streams given that their services are required regardless of the state of the economy. That is certainly the case for Japara, an aged-care provider, which should benefit in the coming years and decades from increasing demand for places at its facilities.
Before you buy any of these companies however, there's one more company which could deliver even greater returns in 2015 and in the years to follow.
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