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There’s no shortage of predictions about where financial markets are headed as central banks hike interest rates aggressively to curb runaway inflation.
While many investors rely on history to guide their forecasts, some – like money manager Don Stuart – believe there’s little precedent for what we’re seeing today.
Mr. Stuart, executive vice-president at Vancouver-based Dixon Mitchell Investment Counsel, points to the economic slowdown happening at the same time central banks are talking about raising interest rates even further.
“Usually, when the economy is slowing rapidly, and people are talking about recession, we’d be at or near the end of the rate hiking cycle,” he says.
Then, there’s the record-low unemployment rate and high levels of household savings, which don’t correlate with a slowing economy.
“There are just so many things that confound the usual playbook,” Mr. Stuart says, which makes it extremely challenging for investors to know how to respond.
Globe Advisor recently spoke with Mr. Stuart about his investment approach in the current market and economic environment:
Describe your investing style?
We like to buy high-quality companies and hold them for a long time. The turnover in our portfolio is relatively low, generally less than 15 per cent a year, which means we hold companies for about seven years, on average.
Some of our top Canadian holdings today include three of the Big Six banks – Bank of Nova Scotia BNS-T, Royal Bank of Canada RY-T and Toronto-Dominion Bank TD-T – as well as Alimentation Couche-Tard Inc. ATD-T, Brookfield Asset Management Inc. BAM-A-T, Constellation Software Inc. CSU-T, Dollarama Inc. DOL-T, and Element Fleet Management Corp. EFN-T
What do you believe is the best investment approach in the current market environment?
When there’s a broad market selloff, as we’ve seen in recent months, it can be a good time to buy high-quality companies. Those with lots of cash flow, good management and a product or service that people use every day. When we come out of the cycle, which we will eventually, those are the names that will likely recover the most.
Now is a very important time for investors because we’re coming up on earnings season. There’s a lot of intelligence that can be gathered from these reports on how management feels about the economic situation, its impact on their operations, and what will happen going forward.
What’s your near-term outlook for the market?
I think the big market washout could be behind us. We’ve already seen markets drop by more than 20 per cent.
That said, I don’t think we will be out of this extreme volatility until we see some relief in inflation. Until we get to a point at which it appears that central banks are done with the rate-climbing scenario, it will be tough sledding for investors.
What’s your advice for investors worried about the latest market drop?
In times like these, there are always a few investors who give up and say, ‘I’m out; sell everything and go to cash.’ As an advisor, you want to try to ensure your clients aren’t one of those people.
Much of the problem comes from investors being presented with market prices on a daily and real-time basis. Imagine if someone did that with the value of your home? You’d probably tell them to get off your property.
It’s a good idea to remind investors that, with stocks, they’re often buying pieces of economically appreciating assets. Our job as money managers, over time, is to find companies that we think we can buy for less than their intrinsic value.
When there’s a broad market selloff, and everything is being hit, it can be an opportunity to reorient your portfolio toward quality, as these names are most likely to experience the fullest and fastest recovery.
This interview has been edited and condensed.
-Brenda Bouw, special to the Globe and Mail
Must-reads from Globe Advisor this week
How to deal with negative equity as mortgage rates soar
Negative equity is a concept Canadian homeowners have not had to deal with in decades, but rising interest rates and falling real estate prices now have advisors bracing for a wave of clients with homes worth considerably less than what they owe their mortgage lenders. While it will take time for higher interest rates to translate into higher mortgage costs as most Canadian homeowners have fixed payments, experts point to getting ahead of the problem. Jameson Berkow looks at strategies to start absorbing some of that pain now.
Four reasons why pessimism about financial markets is so seductive
Investors generally have a “love-hate” relationship with bad news. They hate unpleasant news about the economy and financial markets, but they love to read about it and simply cannot look away. A combination of psychological factors drive the way investors process negative news on the financial market. Jonathan Durocher of National Bank Financial Wealth Management looks at the negativity bias and how we must learn to live with it.
Is now the right time to do tax-loss selling or is it still too early?
Stocks and funds have taken a beating this year amid volatile markets, raising questions as to whether investors should take the opportunity to do some tax-loss selling now. Although tax-loss harvesting is usually done at year-end within a non-registered account to offset investment gains, experts suggest that investors might consider selling losers before then. But the problem with doing it early is that investors may not know what their taxable capital gains will be this year. Shirley Won looks at the pros and cons of using this strategy now.
What a record year for ETF delistings could mean for investors
The number of exchange-traded funds (ETFs) is rising consistently, surpassing the 1,200 mark in Canada this year, but not all of them sustain investor interest and some are forced to close as a result. National Bank Financial reports that 89 ETFs have been launched so far this year as of June 30, with 24 closures, which suggests we could be in for a record year of delistings. For advisors, the goal is to redeploy the capital in the most tax-effective way while ensuring clients’ asset allocations remain intact. Brenda Bouw reports on what’s leading to delistings and how investors can time their exit.
Also see:
How to prepare for a job loss in a potential recession
Why cybersecurity coverage costs in advisors’ E&O insurance are rising
Investors need to prepare for stagflation
‘The return of cash’ – money market fund sector perks up on rising rates
What you and your clients need to know
Why are bond markets shrugging off inflation?
Inflation has peaked – or at least that is what the bond market may be saying. Government bonds on Wednesday took Canada’s soaring inflation figure for June in stride, bolstering the argument by many analysts that the fast pace of consumer price increases this year may have hit its highest level last month. The yield on the 10-year Government of Canada bond rose less than six basis points, to about 3.14 per cent. David Berman reports on why the markets appear to be suggesting that central banks will be successful in taming inflation.
Low-cost ways to keep employees engaged amid a looming recession
Business leaders in 2022 may be experiencing a bit of whiplash. The extremely tight labour market of last year and early 2022 led to hiring difficulties and rapidly climbing salaries, and the current financial climate has left organizations struggling. Businesses see a potential recession on the horizon and are looking at reducing budgets and staff, but they must still focus on retaining good employees. The good news? Money isn’t everything. Nora Jenkins Townson looks at how to stay close to your team in tough times and ensure they feel appreciated, motivated and engaged.
ETFs that hold wide moat stocks and have outperformed peers
Ian Tam of Morningstar Canada looks at 15 S&P/TSX Composite Index-listed ETFs that hold quality companies with “economic moats” – the term popularized by Warren Buffet. Companies with moats exhibit competitive barriers to entry that provide a unique ability to produce return on invested capital above and beyond the company’s cost of capital. Here’s how to identify five sources of moat.
- Globe Advisor Staff