Opinions
John Zechner A Comment -- General Comments From an Expert A Commentary COMMENT Dec 02, 2024
You might be interested:
Someone who really understands the value of a security can really find a lot of bargains on days like these. You can make a case that the overall market is expensive. But at the same time, some of the individual securities underneath are at panic-level pricing, even high-quality ones.
There's been quite a selloff already. Some stocks are down 20, 30, even 40%. Even if you apply the worst-case scenario on the tariff front, many securities are at very attractive buying levels at this time.
Every day in Canada you hear about tariffs, and the concern is well warranted. Businesses and stocks will be impacted. As well, consumer confidence and business confidence are at all-time lows.
At the same time, some stocks are not impacted by tariffs at all. The underlying businesses are doing really well and the business prospects are good. Yet they've been caught in the fund-flow dynamics, where nobody wants to invest in Canada. At some point, that will reverse in the opposite direction.
So it's a really good time to buy those securities.
If there's one thing the market doesn't like, it's uncertainty. And we've definitely seen that this year, a bit of a rollercoaster. Doesn't know why the market's up right now. Market's looking for some clarity, as she and everyone else are.
You want to be able to digest the news and then take it from there. Have to assess the repercussions on Canadian, US, and global markets.
Probably, but the US administration has also said that there's room for negotiation. We've already seen it before, where tariffs have been stated, then reneged on, then postponed. We're all tired of trying to figure out what the implications are.
All we can do is our best in trying to formulate a portfolio that's resilient in any kind of tariff situation. Rather than what amount the tariffs are, the more important question is how long they remain in place.
Automotive and transportation for sure. Consumer discretionary. These are all sectors that her firm didn't have much exposure in to start with, and not because of tariffs. Their portfolios have always been more defensive, shying away from cyclicality.
She likes a consistent dividend stream. As a result, their client portfolios are focused on utilities, pipelines, telcos, and the like. As it turns out, those sectors aren't prone to tariffs. So their portfolios have been performing really well as people make the flight to safety. Her firm has always liked the flight to safety, it's just that it's more popular now than it was last year.
Yes. They recommended this course of action last year when there was the huge risk-on sentiment related to AI. They were buying defensive names at cheaper prices. Now those defensive names are trading a little more expensively, as money has flown out of the risky stocks and into safe havens. As well, money's come out of the US and into areas such as Canada, which is where her firm has always been.
Still, those defensive names have resilience and can outperform in any kind of market environment. Especially as we're going into a period of potential economic weakness and more volatility.
Oligopolies, good businesses for the long term. But a lot of the growth seen over the last 10 years is behind them. There's been lots of consolidation in the space. Economic growth is a bit uncertain in Canada right now, in addition to the impact tariffs. Have to consider how each one manages with cost-cutting to increase margins.
Take a look at RY and TD.
Lots of Canadian names are exposed to the US. That tariffs on energy were initially announced at 10%, and not 25%, goes to show how much the US depends on Canadian oil & gas. Working to export gas to Asian markets, which would alleviate some of the risk.
The move in the CAD since tariffs were announced alleviates the impact of the 10% tariff. She's still confident on the Canadian oil and gas sector, despite the risk of tariffs.
Welcome to the world of dividends! She invests in dividends for clients at any stage of investing, but understands the extra motivation for dividends and stability as a person inches toward retirement.
Last year, they were earning 4.8% on client funds invested in money market funds. This let them have the patience to ease into the market. Seeing more volatility in markets this year, which is good if you're seeking to deploy some cash. The yield on cash has come down significantly in the past year, especially in Canada with the BOC dropping rates. It's now only ~2.5%, and that's not enough to live on. So you're more attracted to investing in high-dividend-earning stocks.
Could we see more volatility in the market? Absolutely. She'd probably get 1/3 in now, and wait and see. On days when the market's taking a beating, buy more. And do it selectively. The pipeline space, for example, is still giving you about a 6% dividend yield. A name like Telus is also one to consider. Still some good opportunities for yield, without the crazy valuations. Selling some of those high-flying tech names at 30-50x PE and buying a utility at 20x PE, doesn't seem so expensive on a relative basis.
Fund Performance Metrics: Benchmark Holdings
Benchmark Holdings indicates the overlap between the portfolio holdings and the benchmark set for the portfolio. The ‘active’ measure in the third column measures the percentage of the portfolio, as position weight, that differs from the benchmark index. It is a metric quantifying the level of active management within a portfolio. While this metric might not give a whole lot to an investor, investors allocating to investments with a higher portion of ‘active’ holdings typically expect a differentiated return profile relative to a passive or a benchmark-driven portfolio.
Unlock Premium - Try 5i Free
Sentiment is very bullishly high, so that's a problem. What's most important to him is the positioning. The average investor has a standard balanced portfolio of 60/40 -- with 30% Canada, 30% US, and 40% bonds. If you haven't done anything in the past year or two, you're way out of line with that and you should be looking at some selling. He doesn't see that happening.
The average equity holding right now in the US is over 70%. It's gone higher, but people haven't taken their profits, and it would make sense to do so. People should be rebalancing periodically. Now is the time to shift things around.
He's been lightening up in areas like bond proxies. If he's less bullish on interest rates, utilities and some of those that have done well may not do as well going forward. Financials and consumer stocks have done well this year, but for him there's a positive feedback loop feeding this. Consumer's bullish and spending a lot, and banks are doing well, in large part because the stock market's going up.
There are a lot of headwinds, and everyone seems bullish. They're positioned too aggressively, and that's a time to be more cautious. He's been through enough bear markets in his life to say that it's a time to lessen your risk profile. At least rebalance, don't be more aggressive than you typically are.