A few weeks ago I attended the Dynamic Leaders Conference in Tucson. It was an excellent way to meet with several of the key managers and find out what they are thinking.
I have included the presentation summary, but here are several takeaways from the conference that I thought were worth sharing.
Protect capital – There are years when it makes sense for a portion of a portfolio to be focused on taking risk and making money, and there are years when one needs to focus on protecting capital. We strongly believe this is a year to be more cautious.
Large currency movements are causing greater volatility – Noah Blackstein said the current volatility in the global markets is being driven primarily by currency movements. It bothers him, but he has no control over it. So he focuses instead on finding the best investments he can. We would agree with that approach. Besides, Canada’s equity markets are less than 3% of overall markets and it makes sense for Canadian investors to diversify their portfolios outside of Canada. Some years a falling loonie will give the portfolio a bit of a boost, some years a rising loonie will hinder growth a bit. This year a surging loonie has hurt any foreign investments. As of June 17, 2016, the S&P 500 is up 1.3% YTD, but when priced in Canadian dollars it is down 5.6% YTD.
Oil & Gold – After being pummelled last year, these sectors have been some of the strongest in 2016. The jury is out on both of these sectors, however. Is this just an overdue bounce off extreme lows or are the fundamentals finally starting to change?
The outlook for global growth is lukewarm at best – Corporate earnings continue to stagnate. Despite all the stimulus and money that has been printed in recent years, this continues to be a weak recovery.
Asset class valuations are stretched – given today’s starting point, a passive buy and hold strategy which focuses on broad stock and bond indices will likely struggle over the next decade. Valuation metrics point to low single digits for the equity markets. However, that may be better than what bonds do
TINA – There Is No Alternative - I hadn’t heard this term before. Central banks are taking us into uncharted territory by forcing interest rates lower in an attempt to boost growth. This in turn forces large numbers of investors who traditionally would invest in fixed income to move into riskier assets such as equities and real estate. If Canadians could get a 5 year GIC with a 5% yield then stocks wouldn't look as attractive, but investors are faced with record low interest rates, even negative yields, in a significant portion of the world's bond markets.
NIRP - Negative Interest Rate Policy – Now, some central banks are trying a new tool to spur investment: negative interest rates. Imagine instead of earning interest on your savings or GICs, you pay a bank interest to hold your money. Or you pay $10,500 for a 10 year government bond that will pay you $10,000 when it matures 10 years from now. How does that make sense? Once again, anyone who needs to grow their assets is being forced into riskier assets.
We are in uncharted territory. Despite numerous crises, panics, economic recessions and depressions throughout the course of history, we have never seen negative interest rates in the last 5,000 years. This is not a small isolated anomaly. Myles Zyblock, Dynamic’s Chief Investment Strategist, said that $7.8 Trillion, or 34% of global government bonds, are priced for a negative yield to maturity.
We still believe equities offer better upside potential, but we made significant changes to the portfolios in the last month to try to reduce the potential volatility. This is a time to be cautious.