Faced with the choice between volatile markets and the death-by-a-thousands cuts that high inflation imposes on savings, investors may be tempted to throw their hands up in surrender these days.
North America’s major stock indices, after all, are deep in the red this year, with the S&P/TSX composite index off eight per cent, the Dow Jones Industrial average falling nearly 11 per cent and the tech-heavy Nasdaq plunging more than 30 per cent, under pressure from a series of factors including tighter monetary policy, geopolitical tensions and a slowing economy.
Inflation, meanwhile, remained at a robust annualized pace of 6.9 per cent in September.
For portfolio managers, these conditions have made the task of finding safe havens for their clients that much harder.
David MacNicol, the president and portfolio manager of Toronto-based investment firm MacNicol & Associates, said he believes central banks will struggle to get ahead of decades-high inflation, prompting more aggressive rate hikes from the US Federal Reserve and the Bank of Canada. But he nevertheless expects to see higher markets six months from now, though not across all stock indexes.
“Inflation is not defeated yet,” MacNicol said. “So, (central banks are) either going to have a lot more rate increases or you’re going to see the economy just get tougher and tougher.”
Despite the challenging economic environment, MacNicol’s firm has been bullish on the energy sector, particularly the diesel space, which is seeing soaring prices. Heading into the heating season, MacNicol also pointed to natural gas as a potential winner, due to the sector’s ongoing supply -demand dislocation. MacNicol also pointed to value in precious metals and commodities, expecting them to rebound over the short-term.
While MacNicol argues that there is more runway in energy stocks, his firm is avoiding those with high debt loads, with the strength of a firm’s balance sheet becoming vital once again.
Bonds, too, are off his list.
“The bond market is not something that we’ve liked since about 2009,” MacNicol said, adding that the traditional advice of a balanced portfolio has gone out the window. “We’ve really not owned any bonds for our clients and we wouldn’t ‘t recommend people starting to buy at these levels yet either because we still see rising rates.”
On the other hand, Greg Newman, senior wealth advisor and portfolio manager at Scotia Wealth Management, argued that bonds could be a viable investment.
“The good news for investors is that money on the sidelines is paying a lot,” Newman said. “You could be in high-interest savings and earning, let’s call it 3.65 (per cent). That is liquid, which really isn’ t bad.”
Newman also pointed to other fixed-income assets, such as investment-grade liquid coupon bonds with over five-per-cent yields, other high-yield bonds that could net a 6.7 per cent pay-out and preferred shares.
“There’s a lot of places in fixed income or quasi-fixed income (and) preferred, that are throwing off really good yields and then in stocks themselves,” Newman added.
Among the sectors Newman is looking at are the telecom sector, where he sees opportunity in BCE Inc., which has seen its shares fall six per cent this year, and the renewable energy sector, with names like TransAlta Corp. and Algonquin Power & Utilities Corp. top of mind.
Newman expects investors will await company earnings to assess to what extent the Bank of Canada’s rate hikes are weighing on the markets.
“The next thing that people are starting to consider is: What’s going to happen to earnings, are they going to erode?” Newman said. “And is anything going to break with all these interest rate increases?”
With inflation still running hot and economic growth slowing, Newhaven Asset Management Inc. president and portfolio manager Ryan Bushell said investors will likely be much more selective with where they invest.
“My personal view is I don’t think we’re going to head back to (an inflation rate of) two per cent anytime soon,” Bushell said. “Just that alone creates a bit more gravity and a bit more capital discipline. ”
Utilities and power sector companies have been catching Bushell’s eye in recent months since the utilities segment has outperformed and there is always a demand for power. Bushell pointed to Brookfield Renewable’s agreement to acquire nuclear services provider Westinghouse Electric Company in October as an interesting development in that space.
When it comes to tech, Bushell said he was still avoiding buying back into the FAANG (Facebook, Apple, Amazon, Netflix, Google aka Alphabet) giants.
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Those with a longer investing horizon might want dabble in names such as Meta Platforms Inc. (formerly Facebook) Alphabet Inc. and Netflix Inc., he said, but in uncertain times his focus is on stability. That is where Bushell had positioned clients heading into earnings season in the fall.
“What I’m doing for clients, I was positioned in stable, dividend-paying, infrastructure-based, fundamentally strong cash-flow companies,” Bushell said.
While that doesn’t make them immune to downturn, it does mean they should be more resilient, he said.
“Like everything, they get hurt when everything goes down — but should also recover.”
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