My recommendations for this year are much the same as they were at the end of 2018. Not much has changed, except valuations have become more extreme and the economic and market risks are even more acute than they were just over a year ago. So, what to do? After more than 30 years in this business, I can tell you two things that are certain even in this highly uncertain environment, where market pricing, in the vast majority of cases, is misaligned with the underlying fundamentals:
- There is no such thing as a sure thing;
- Never put all your eggs in one basket.
So for equities, stick with a theme of quality, low cyclicality, strong balance sheets, and reliable and recurring cash flow streams. For bonds, go for extremely high quality. Get the alpha by going further out the yield curve.
Remember that no one thought you could make money in a 3 per cent long-bond world, but it delivered 18 per cent in 2019. Expect more of the same in 2020. Maintain a healthy allocation in hard assets as a hedge against our deflation/disinflation thematic.
We favour the following strategies for 2020:
- Cash (dry powder ready to be deployed);
- High-quality bonds of long duration (a higher sensitivity to changes in interest rates in anticipation of a disinflationary environment);
- Utilities stocks;
- Defence/aerospace stocks;
- Consumer staples that have a low degree of price-demand elasticity;
- Japanese equities, which remain a bona fide secular supply-side story;
- Precious metals;
- Farmland/alternative hard assets/commodities in short supply (lithium, palladium);
- Energy stocks that are dirt cheap and priced much in the same way financials were in early 2009 (for extinction).
As far as investment advice is concerned, there is what to own (as in above), and then there is what to avoid, which is equally important. In terms of what to avoid, think credit hedge funds and low-grade corporate bonds and loans. These investments are juiced up by a ton of leverage and lack liquidity when times get challenging.
In my view, leverage and leveraged-credit strategies are the most dangerous vehicles in this ultra-late-cycle environment. Investors in these instruments are not adequately protected against the looming recession – or recession-like pressures – that will impede corporate cash flows and generate the conditions for a classic end-of-cycle default wave. Remember, the quality of the investment-grade corporate-bond market globally has never before been as junky, or filled with as many low-quality issues, as is the case today.
For the coming year, invest with managers who are creative, have a thought process that is complete and comprehensible and who have a proven record in investing around ideas instead of leverage. Make doubly sure that you are long one L (liquidity) and be short the other L (leverage). I cannot stress that enough, because we live in a time of almost unprecedented linear extrapolation – blithely expecting past performance to carry into the future – and complacency.
Capital preservation is one investment objective that deserves particular thought and attention as we begin 2020. At a time of heightened uncertainty, this is not a bad thing to contemplate. In fact, I would call it prudent.
David Rosenberg is founder of independent research firm Rosenberg Research and Associates Inc.