Amid wild swings, the search is on for sec­tors that could snap back thanks in part to green­back’s de­cline

The Globe and Mail Metro (Ontario Edition) - - MARKETS - DAVID RAN­DALL

With bond and eq­uity mar­kets from the United States to emerg­ing mar­kets all on pace to lose money this year, in­vestors have not seen this much red on their screens since 1972, the last time no as­set class re­turned at least 5 per cent.

Yet, fund man­agers are finding things to like de­spite the re­cent mar­ket volatil­ity, which sent the Dow Jones In­dus­trial Av­er­age down more than 2 per cent this week.

As they start to po­si­tion their port­fo­lios for 2019, fund man­agers, from firms in­clud­ing ValueWorks, Sierra In­vest­ment Man­age­ment and Fed­er­ated In­vestors, say they are look­ing at sec­tors that could snap back next year thanks to a com­bi­na­tion of more at­trac­tive val­u­a­tions and a de­cline in the U.S. dol­lar.

“If you look out at the broader pic­ture, a lot of things are go­ing right,” said Terri Spath, chief in­vest­ment of­fi­cer at Sierra In­vest­ment Man­age­ment, cit­ing strong con­sumer con­fi­dence and other eco­nomic in­di­ca­tors. “It’s easy to make a bull case be­cause the econ­omy is hum­ming along just fine, but the mar­ket is ner­vous be­cause the head­lines are re­ally loud and no one likes the un­known,” she said.

Part of the yield curve in­verted this week when yields on five-year U.S. Trea­suries dropped be­low those on both the two- and three-year se­cu­ri­ties, a sig­nal that has pre­ceded ev­ery U.S. re­ces­sion in re­cent mem­ory by be­tween 15 months and two years. Yet, the long de­lay be­tween a yield curve in­ver­sion and a full re­ces­sion can still be a prof­itable time to in­vest, said Charles Le­monides, founder of New York-based ValueWorks.

“I don’t buy the the­sis that the econ­omy is slow­ing, but I do be­lieve we are late in the cy­cle. We’re go­ing into a pe­riod where in­vestors are get­ting a lit­tle fooled by the head- lines and avoid­ing names that have ex­cite­ment,” he said.

As a re­sult, Mr. Le­monides has in­creased his long ex­po­sure to com­pa­nies that have sold off, in­clud­ing bat­tered semi­con­duc­tor maker Mi­cron Tech­nol­ogy Inc., whose shares are down 37 per cent over the past six months, and iPhone maker Ap­ple Inc., whose shares are down nearly 23 per cent over the past three months. At the same time, Mr. Le­monides has in­creased his short po­si­tion on de­fen­sive stocks such as con­sumer sta­ples com­pa­nies Clorox Co. and Church & Dwight Co. Inc., which have ben­e­fited from the mar­ket volatil­ity.

Chad Ovi­att, di­rec­tor of in­vest­ment man­age­ment at Hunt­ing­ton Na­tional Bank, said his firm has been in­creas­ing its al­lo­ca­tion to U.S. large-cap stocks in an­tic­i­pa­tion that de­clin­ing bond-buy­ing by the Euro­pean Cen­tral Bank and a res­o­lu­tion of U.S.-China trade ten­sions will de­rail the rally in the U.S. dol­lar this year. That should im­prove mar­gins for U.S. ex­porters.

A Reuters poll of 60 cur­rency an­a­lysts that ended Dec. 5 fore­cast that the green­back will be weaker against ma­jor currencies next year, with most of the de­clines com­ing in the sec­ond half of 2019.

Linda Bakhshian, a port­fo­lio man­ager of sev­eral value-ori­ented funds at Fed­er­ated In­vestors, said the re­cent stock-mar­ket volatil­ity has made stocks, in­clud­ing Ap­ple, JPMor­gan Chase & Co., Wal­mart Inc. and Mi­crosoft Corp. more at­trac­tive at a time when the U.S. econ­omy con­tin­ues to look stronger than ei­ther Europe’s or China’s. Low oil prices, con­tin­ued job growth and strong con­sumer spend­ing will likely pro­long the U.S. eco­nomic ex­pan­sion well past next year, she said.

“If the mar­kets were to close for the year to­day, peo­ple would go into 2019 think­ing that there are more op­por­tu­ni­ties given the val­u­a­tions,” she said.

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