Strategies in a world cast adrift
Caution is the watchword for unstable times
The two words that Janet Yellen emphas i z ed in her s eminal speech last week were “global” ( 11 references versus four at her February congressional t estimony and just once in her last December speech … just ahead of the you- know- what hitting the fan) and “uncertainty” ( 10 times, up from three citations in February and eight in December).
So she is more concerned about the downside risks to growth and inflation from the weakening pace overseas than before, that much is clear.
Rate risk is off the table, but the reasons for it — a lack of growth visibility — are why investors did not bid up stocks even more despite her overt dovish tone.
I don’t think it can be lost on investors that the Fed is less of a sustainable positive force for the equity markets at current stretched valuations.
The market multiple is two points above fair- value — in other words, priced for $ 140 of operating earnings for the coming 12 months whereas t he consensus among bottom up analysts, who have not budged is closer to $120.
A two- multiple- point forward price-to-earnings multiple expansion in barely over a month does not happen too often.
We have enjoyed a great run back up to the top of the range and at a time when the Q1 earnings season is going to be very challenging.
At the same time, sentiment is no longer a tailwind — complacency has set in, in stark contrast to the panic we saw at the February lows.
You want to always buy fear and sell greed in this business of investing.
As for the U. S. economy, it was nice to see the upward revision to fourth quarter GDP growth to 1.4 per cent at an annual rate from 1.0 per cent, but the tracking for the current quarter is now below 1 per cent.
This would make it 10 of the 27 quarters since the recession ended nearly seven years ago where growth came i n south of 1.5 per cent, double what is normal in a typical expansion.
I am not calling for recession, but I see many economists hanging on to their one- i n- four probabilities for the coming six to 12 months ( Wells Fargo the latest) which just doesn’t jibe with a forward P/E multiple some two points above the norm. So there is limited visibility on earnings or the economy, that was Janet Yellen’s macro message, and then we have to assess the political risks that surround us globally.
Look at the world around us. In a word, instability. In two words: no leadership.
We have a horrible primary season on our hands stateside as the candidates trip over themselves over which one can be the greatest anti-free-trader and antiWall Street crusader. Populism at its best.
Then there is the Brexit debate in the U. K., the return of terrorism to the f ront burner after Brussels, Putin’s involvement in the Middle East, political turmoil in Brazil.... The list goes on.
All of this uncertainty caps the upside in equities, even if the response thus far has been muted to say the least.
This is a choppy year that doesn’t look to offer much from the averages, but beneath t he surface, what probably pays well are those stocks that few are willing to own — the unloved ones — and those that have blown up with a catalyst for change.
So as I search for a market theme, for the most part, it is simply about playing yield, earnings stability and low volatility — “Safety and Income at a Reasonable Price” strategies — on one end of the barbell and inflation protection on the other side of the barbell.
In terms of regional exposure, the country that has the most visibility right now is Canada, which has emerged as a bastion of political stability in a sea of global instability, and one of few countries where fiscal policy has grabbed the torch from monetary policy.
The latter means the Canadian dollar’s switch from a flightless bird to a loon with wings likely has some durability.
Oil has taken a bit of a breather as it’s had a nice run, but the pipelines serve as a low beta way to play energy, with a near- 5 per cent dividend yield and 8 per cent payout growth.
The Canadian banks have also had a nice run, but the yield of 4 per cent- plus remains attractive and a lowrisk way to play the recovery in oil via reduced concerns over loan-loss provisioning.
Corporate credit also looks very good even after the nice recovery of late. Here is an area, corporate bonds, where you stand a good chance at current yield levels of say 8 per cent for high yield and 4 per cent for BBB paper to generate equity- like returns in a safer part of the capital structure.
In fact, in our own asset mix, the latest shift we have made is from stocks to corporate credit and regionally from Europe and the U. S. into Canada.
YOU WANT TO BUY FEAR AND SELL GREED IN THIS BUSINESS OF INVESTING.