The electronic ticker display outside the Toronto Stock Exchange Tower, after the market closed on Jan., 24, 2022.Christopher Katsarov/The Globe and Mail
Market strategists have produced their top calls for the year ahead, offering sage advice on where investors can expect to find the best opportunities for making solid returns in a complex world. And contrarians are turning some of the more popular calls upside down.
Contrarians, as their name suggests, go against the flow, with the belief that popular opinions can reflect too much optimism, leading to disappointment. Tech stocks in 1999 and cannabis stocks in 2018 offer two extreme examples.
Similarly, popular opinions can leave appealing investments unloved – and cheap – offering lots of upside potential when sentiment shifts.
The best contrarian moves in 2023 included betting on U.S. and Japanese equities as an anticipated U.S. economic recession failed to materialize; avoiding commodities as Chinese economic expansion stumbled; and loading up on Bitcoin even as cryptocurrencies were linked to money laundering and fraud.
Some of the top contrarian takes for 2024 may look like long shots right now compared with some of the more popular predictions – but that’s what makes them contrarian.
Popular call on the economy: Behold the soft landing.
Inflation has been declining while U.S. economic activity appears poised to avoid recession – a rare combination that makes the Federal Reserve’s aggressive rate hikes in 2022 and 2023 look like a moon landing, in terms of their precision.
Wall Street expects the U.S. economy will expand by 1.2 per cent and the Fed will cut interest rates as inflation continues to subside. Michael Hartnett, investment strategist at Bank of America, summed up a recent fund manager survey as “Goldilocks ‘24.” – the economy is running not too hot and not too cold.
For investors, can it get any better?
The contrarian take: Behold the upcoming recession.
Soft landings – whereby an economy continues to expand, even when interest rates are high – often serve as transitions from economic expansions to economic contractions, according to David Rosenberg, an economist and head of Rosenberg Research. Previous soft landings, he said, included 2000 and 2007 – neither of which ended well.
“We are in a soft landing. The question is what happens next,” Mr. Rosenberg said in an interview this week. Fiscal stimulus helped buoy the U.S. economy this year, but won’t help in 2024, at a time when the lagging impact of rate hikes dig into the real economy.
“I’m still in the recession camp. It has been delayed, not derailed,” Mr. Rosenberg said.
Popular call on equities: U.S. stocks are going to the moon.
The S&P 500 delivered handsome gains in 2023, led by a handful of big tech companies – even as investors in Canada and the United States sat on US$6-trillion in cash, according to BlackRock. The bullish case rests on the rally broadening out in 2024, as more stocks respond to the sunnier economic outlook.
Analysts estimate that profits from companies in the S&P 500 will rise by an average of 11 per cent, while a number of Wall Street strategists expect the S&P 500 will end the year at fresh record highs.
David Kostin, a strategist at Goldman Sachs, expects the index will rally to 5,100 as the Fed cuts interest rates, implying a gain of 7 per cent from late 2023. “As rates begin to fall, investors may rotate some of their cash holdings toward stocks,” Mr. Kostin said in a recent note.
The contrarian take: The moon is priced in.
High valuations suggest that U.S. stocks are already reflecting a bullish scenario of economic expansion, rising corporate profits and more relaxed monetary policy.
Michael Wilson, chief investment officer at Morgan Stanley, noted that the valuation for U.S. stocks has expanded over the past year to a lofty level above 19 times forecast earnings – which he believes leaves little room for improvement, even if U.S. corporate profits rise next year.
“In a broadening, healthier economic environment, multiples will come down as earnings normalize,” he told Bloomberg in December.
That’s a key reason why he expects the S&P 500 will end 2024 at 4,500, implying a down year for U.S. stocks based on the current level of 4,768 for the index on Dec. 19.
Popular call outside the U.S.: Bet on Mexico.
China’s loss is Mexico’s gain as companies build production capacity with a more reliable trading partner and one that is significantly closer to the U.S. border – an emerging trend known nearshoring.
Some observers, including BlackRock, believe Mexico is the best example of this trend, with its relatively low labour costs, a border shared with the United States and membership in the U.S.-Mexico-Canada Agreement (USMCA), the free-trade agreement.
“While reshoring or nearshoring plans may be enacted over several years, stock price shocks will be felt far sooner,” Linus Franngard, a senior portfolio manager at BlackRock, said in a note.
The contrarian take: Stay closer to home.
That’s right, Canada. It may not be the most popular destination for investors right now, given that the S&P/TSX Composite Index underperformed the S&P 500 in 2023 by 20 percentage points. The energy sector has stalled, Canada’s biggest banks have been constrained by rising loan losses and economic activity declined to just 1.1 per cent in the third quarter.
“Hard-landing scenarios have paralyzed most Canadian investors we have connected with in recent weeks,” Brian Belski, chief investment strategist at BMO Capital Markets, said in a mid-December note.
But he believes that Canadian stocks are already reflecting a lot of bad news, limiting downside risk, while a rebound in corporate earnings and stock valuations – which are not reflected in stocks – can deliver outsized gains of more than 25 per cent.
Mr. Belski has a contrarian take within this contrarian take: Look for opportunities within the consumer discretionary sector (think Aritzia Inc., Sleep Country Canada Holdings Inc. or Canadian Tire Corp.), which tends to rebound quickly from recessionary selloffs.
Investors could wait for better news to appear, of course. But contrarians tend to strike when the news is grim.