David Rosenberg recently suggested investments in sectors such as financial and consumer discretionary could be better for portfolios than consumer staples and health care.Deborah Baic/The Globe and Mail
Well, getting down to brass tacks, we have recently come to three main conclusions about the current market environment.
The first is recognizing that the political risks in Europe were becoming too difficult to price, whether it was the "Brexit" vote, the rapid decline in Angela Merkel's approval rating, the unstable coalition government in Spain, the backtracking of structural reforms in France, the solvency issues at Italian banks and, of course, the resumption of default risks in Greece.
At the same time, the European Central Bank has taken a wait-and-see approach toward further stimulus, and we have seen the euro climb all the way back toward $1.15 (U.S.) versus the U.S. dollar.
The second conclusion was that Canada was looking attractively priced, especially when the loonie was trading below 70 cents in January.
Of course, the loonie has come a long way since, as has the oil price for that matter, so a lot of good news has been priced in already.
But when you look around the world, Canada still does stand out as a bastion of stability in a sea of global instability, and whether you like Prime Minister Justin Trudeau and his team or not obscures the simple fact in the financial markets: Investors crave stability above all else.
The reality is that what you see is what you get in Canada for the next four years with a stable majority government.
As it stands, just as the federal government embarked on moderate fiscal stimulus, almost every other government around the world is simply sitting idly by and letting their central banks do the heavy lifting. This is what makes Canada fascinating as Bank of Canada rate cuts have been appropriately priced out.
The economy here is only now feeling the lagged positive impacts on exports and manufacturing shipments and order books from our lower dollar.
The federal fiscal stimulus hasn't even been rolled out yet and already the Canadian economy is about to post a first-quarter gross domestic product growth performance in excess of a 3 per cent annual rate – which compares with 0.5 per cent in the United States and 2.2 per cent in Europe.
What is also interesting is that commodity prices have accounted for just two-thirds of the rebound in the Canadian dollar in the past four months. The other one-third is the global investment community doing a complete rethink of Canada's growth prospects and domestic assets; they are in the process of being rerated and in a positive way. So we are participating in that rerating.
The third conclusion is that we are going to be staying in this "lower for longer" global interest-rate environment for quite a while longer.
I say this because of that seminal speech U.S. Federal Reserve Chair Janet Yellen delivered in New York, titled "The Outlook, Uncertainty, and Monetary Policy," which was the sort of game-changer I think historians will still be talking about years from now.
I have read just about every major policy speech by every major central banker in my 30 years in this business, and while I have seen the word "uncertainty" show up in the body of the text many times, never have I seen a central bank chief slip it into the headline.
The world's central banks will be forced into an even more prolonged period of monetary accommodation, until inflation not only goes up, but stays up – that is the message, pure and simple – and at a time when $8-trillion, or 20 per cent, of the world's sovereign government bond market already trades with a negative yield.
So all this means lower for a lot longer – low growth, low inflation and low interest rates – from an investment strategy standpoint, it is back to "Safety and Income at a Reasonable Price," all over again.
The stretch for yield is unlikely to subside any time soon – so a continued focus on accumulating cash flows (dividend growth, dividend yield, corporate credit and exposure to hard assets that spin off an income stream such as REITs and pipelines) remains the name of the game.
The high-yield corporate bond market is a good surrogate, too.
As for the equity market, it is too richly priced currently and the technical position has eroded.
There have been 16 brief corrective phases this cycle of at least 5-per-cent pullbacks and seven of these were at least 8 per cent. Each of these end up being buying opportunities as there is plenty of cash on the sidelines, sentiment is hardly excessively bullish and recession odds are still quite low.
That said, we also have beefed up our hedge-fund exposure to take advantage of the stepped-up volatility and capture some of this downward pressure on the short side.
At the same time, we are keeping cash levels relatively high with a view toward stepping back in the market once the forward price-to-earnings multiple reverts to the mean of 15 times from over 17 times.
Still, caution is the watchword for the time being and a heavier focus than usual on capital preservation.
The answer is income, and so it shouldn't come as a shock then that three of the best performing equity sectors so far this year are utilities, telecom and pipelines, whose yield and defensive characteristics have rewarded these three sectors with a 14-per-cent blended average total return for the year through the end of last week, on both sides of the border.
David Rosenberg is chief economist with Gluskin Sheff + Associates Inc. and author of the daily economic newsletter Breakfast with Dave.