Opinions Greg NewmanA Comment -- General Comments From an ExpertA CommentaryCOMMENTJan 04, 2024
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With all the volatility going on in markets right now, if a company misses earnings or revenues then it'll take a hit. That's why we've seen some stocks fall upwards of 15-20% in a day.
His team believes that the proper exposure is from 10-20% in tech. That would avoid a meltdown similar to 2000, or even 2022. Important to look not just at the individual tech stocks, but also at the broader picture in the world. Make sure you have global exposure, different sectors. Some sectors are less risky or less volatile.
Nice to have a mix, because that's how you avoid losing $$ in the market.
For Canadian stocks, you want to be in the infrastructure play. Federal and provincial governments want to build roads, bridges, data centres, hospitals, etc. Examples include STN, TIH, and BDT.
After that, you want exposure to commodities. Stocks have been hurt this year due to the rising US dollar, as all commodities are priced in USD. If the USD falls in the long term, commodity prices should rise.
A third way to play would be through utilities. He has TRP and EMA in client TFSAs. You want exposure to the banks, as the federal government has gone to the banks to ask them to release more capital for business lending.
These types of plans aren't short term. They're the kind that will take 10-15 years.
Outside Canada you want healthcare, Asia, and robotics.
Extremely volatile! Anytime you double your $$, you should be selling half. PANW trades at 255x PE, CRWD is at 200x. Rising interest rates could have an outsized negative impact.
FTNT had bad earnings the other day, got crushed by 25%. CRWD and PANW have had decent earnings. If no guardrails put on AI, important for these companies to step up and start to protect network systems.
Oil is high right now simply because of what's going on in Iran. Supply is starting to become available. If oil starts to come down, shorting the major oil companies would be an idea. If oil gets back to $160, the shorts will pay off; if it doesn't, then they won't. They don't do shorts at his firm; long positioning only.
Longer term, it's a long way down to $60 a barrel. In the near term, there will still be M&A going on in the sector (especially in Canada).
Stock buyer at present. Natural resources has been falling but it has a great future. The primary driver for the drop is higher interest rates. Precious metals in particular reflects the level of real interest rates. In the US questions about credit quality affected the availability capital to the natural resources industry making growth concern appear. Operating results in the sector has been impacted by higher energy costs. Gold is very attractive at this level. The purchasing power of the USD and CAD is deteriorating at a higher pace than CPI suggest and that is going to be accentuated in the next 5 years. He likes uranium and think that the uranium companies don't reflect the underlying strength in the uranium price. Market is mispricing uranium equities in a big way.
Tremendous run. Valuations are not great, so he wouldn't be adding new $$. Don't worry about the quality at all. But he remembers in 2000, when the dot-com bubble burst and markets collapsed, a lot of the great Canadian banks fell 50%.
He thinks a broader market correction is inevitable (sometime in the next year or two). At that time, you can buy the dip. Great long-term investments.
Right now, the obvious outcome seems to be that Washington will be facing gridlock. Gridlock in Year 3 of a presidential cycle, historically (50 years), is very bullish for stocks. He's not sure we'll get that this time around, but not sure you want to be against that at this point.
If we get a fiscal cliff, there will be a lot less government spending to boost economic growth. A lot of the earnings momentum would come out of the market. A lot of the names that have been beaten up and forgotten would benefit. If the global economy slows, market multiples would come down and $$ would rotate into the defensive sector. He'd favour value over growth.
US Spending
When you look at the projections from the US Congressional Budget Office, the picture keeps getting worse and worse. So it almost doesn't matter who wins in Congress. They all do a really bad job at balancing the books.
Which part of the deficit is really causing the biggest stress right now? With interest rates rising, it's the cost of financing the debt.
As of now, the US debt sits at $40T. The US Treasury just put out a report detailing how it will pay for that debt, by issuing a certain number of T-bills and bonds. The cost for each new issuance of debt just keeps increasing. It needs to be controlled and it's not up to Treasury, it's up to Congress.
His last graph shows charts for ZTL.F (hedged) and TLT. They have the same volatility as the S&P 500, so it's not risk-free. But if the US economy and equities are going to falter, long bonds are still the best pick out there.
The message, loud and clear, in recent weeks of earnings is the market is becoming more selective. Companies that delivered that earnings that would have been exceptional a year ago, are now facing pressure--strong earnings are no longer enough, but also need to justify high valuations, sustainable profitable, and a tangible return on AI. That enthusiasm about AI has shifted to seeing returns on investment and cash flows. This is healthy for the broader market, happening during surprising resilient economic growth. However, there's rising inflation above the US's 2% target. She's looking at companies' underlying cash flow and watching the bond market. Overall, the market looks constructive and you don't need to be defensive.
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Based on polls, it looks like Trump will lose the House which will turn him into a lame duck president, then he will default to more executive orders. Meanwhile, central banks will keep raising interest rates. Yesterday, Google got hit, so the market is asking who will pay for AI. Overall, he's trimming and pull back, including Google after more than doubling, energy and precious metal.
For new money, telcos (as well as REITs and other sectors) have been hit as interest rates keep rising. The telcos, though, have aleady cut dividends, so they are relatively defensive. Getting more income into your portfolio now makes sense. So these sectors act like a bond proxy, which are buys.
A base asset allocation is 70/30. In a strong bull market, where we don't see the market going down, you can get a swing where you get up to 90% equities. You could also swing the other way, going down to a 50% equity weighting.
In an environment like this, even though we're in a bull market and in the middle of a recovery, you have to have respect for the fact that bond yields are so high. In a registered account you can still get 5%+ on a GIC without any sort of headache. In non-registered accounts, you can buy coupon bonds that are very attractive from a tax perspective.
There are still all these risks in the market and valuations aren't cheap anymore. From a risk/reward perspective, being on your asset allocation makes sense.