Time to take a little off the table

It’s hard to get out at the top of your game. Just look at boxing, where examples abound of aging f ormer champions who can’t resist one last shot at the title. Or consider the world of gambling: who among us ( those of us who indulge from time to time, for entertainment purposes only, of course) hasn’t kicked him- or herself for staying in the game even after we’ve made a tidy sum, all in the hopes of making it even tidier?

If, like most Canadian investors, you’ve got a good chunk of your equity portfolio in domestic and U. S. stocks, you might be “thinking” along these lines, too. And why not? The S& P/ TSX composite, the Dow Jones industrial average, the S& P 500 — they’re on a roll. The Dow passed the mythical mark of 20,000 last week, while the S& P/ TSX flirted with a record high. Even if intuition and history tell you this can’t go on forever — well, you’d hate to miss out just in case it does.

Still, there are good reasons to consider t aking some winnings off the table and putting it to other uses. Valuations are high on U. S. and Canadian markets. That doesn’t necessarily mean the bull has run its course, but it does suggest that gains of the kind we’ve seen over the past year may slow.

Other factors raise the risks to continuing stellar returns. American markets are pricing in the positive impact on earnings of the new U. S. administration’s promised tax cuts, infrastructure spending and regulatory reform. Yet the extent of those programs remains uncertain. Moreover, if they do become reality, their inflationary impact might prompt the U. S. Federal Reserve to be more hawkish than markets now assume. At some point, rising rates could undermine equities.

In Canada, meanwhile, the rise in oil prices has clearly benefited the stock market. But as OPEC producers have implemented production limits and inventories remain high, we probably can’t expect another 60- per- centplus increase like the one we’ve seen over the past year.

So where might investors look for other opportunities? Here are a few ideas: ❚ Japan New York and Toronto aren’t the world’s only hot markets. Since hitting their 2016 lows last summer, Japanese equities have been on a tear. The Nikkei 225 has climbed 30 per cent since, and the broader Topix has done nearly as well. Yet there’s some reason to think there is still upside in Japan.

One is the decline of the yen against the U. S. dollar — a benefit for Japanese exporters that policy- makers have been struggling to engineer for a long time. If the U.S. administration’s plans on trade and investment materialize, and if the Fed continues tightening, the greenback rally could have some legs yet — good news for Japan, which in December recorded the first increase in exports ( 5.4 per cent) in 15 months. Meanwhile, the Bank of Japan seems set in its accommodative ways, targeting a zero long- term bond yield and continuing its quantitative easing, which may mean more yen downside.

While yen depreciation is an immediate boon, other factors support a longer view on Japanese stocks. Valuations are still relatively low, and return on equity is increasing. Meanwhile, low rates are pushing Japanese firms to buy back shares at record levels. ❚ South Korea Two themes dominate media reports from the Asian peninsula: the threat from its dictatorial neighbours in North Korea, and the continuing scandal embroiling President Park Geun- hye. These might be enough to dissuade investors, but there are bright spots in Korea’s clouds.

Like the yen, the won has been declining against the greenback. That supports exports — which climbed 25 per cent during the first 20 days of January over the same period last year, in U. S.- dollar terms. Meanwhile, stock valuations are lower than in Japan, and return on equity is higher. And on a more general level, optimists might see hope in Park’s troubles, as a sign that Korea’s notorious chaebol system is on the wane and a new era of better political and corporate governance is around the corner. ❚ India Prime Minister Narendra Modi’s demonetization effort — the government withdrew 80 per cent of banknotes in circulation last November in an attempt to crack down on India’s shadow economy — has no doubt created hardship for millions of Indians and reduced personal and corporate spending. That could slow what was the world’s fastestgrowing large economy by as much as a full percentage point, according to some estimates.

Yet the negatives may be contained even as the benefits of demonetization spread. Perhaps chief among them is that it will force Indians to transact more through banks. That should support the country’s troubled financial sector and effectively inject liquidity into the formal economy, boosting GDP growth.

Which, by the way, is not too shabby, even assuming the cash hit: the World Bank figures growth will come in at seven per cent in the fiscal year ending in March.

Indian investors reacted to demonetization negatively, with the Sensex index dropping six per cent between early November and late December. But the tide seems to have turned: the index has climbed almost five per cent since Jan. 2, suggesting investors are already looking beyond Modi’s cash grab.

Maybe you should, too.