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Tremendous volatility in markets around the world, all since the last Fed meeting at the end of July. Messaging from the Fed was that, being data-dependent, it thought it was ready to go. Not surprising that the market's really focused on this.
Fed's recognized that labour market is softening. Non-farm payrolls was one of the catalysts that surprised the market, prompting last week's volatility. Unwind of the carry trade in the Japanese yen. More volatility to come. Typical of dog days of summer, leading to September and what is usually the worst month of the year for markets.
The narrative for the better part of the last year and a bit was OK, inflation's coming down, the Fed's going to cut, soft landing. Reality is that the Fed will need to cut, not because inflation's at target, but because the economy's softening. And if the economy's softening, not a good reason to be cutting, and so the market all of a sudden sees it more as a negative.
A year ago, bad data was good news. Not sure if that's still the case. If retail sales soften, and if inflation doesn't tick down as expected, all those things become stumbling points for the market.
Generally, it means nothing for the earnings of the S&P 500. Geopolitical tensions tend to be very quick, though Russian-Ukraine war is now going into its third year. For the first couple of weeks there was portfolio repositioning, but now markets don't care. It still didn't mean an iota for S&P earnings.
Now it's how bad does the escalation become in the Middle East? We don't know. The uncertainty makes markets anxious. Once the event comes, it's typically a buying opportunity.
ZWU is far more interest-rate sensitive, as it focuses on utility companies. Generally as interest rates fall, utilities do better. HMAX is financial services, insurance, lifecos. Falling rates not necessarily good for them, because they're more sensitive to interest rate cuts for a slowing economy with prospects of a harder landing.
So, if rates are coming down due to an economic slowdown (as he believes), then ZWU will probably outperform HMAX in the short run.
ZWU is far more interest-rate sensitive, as it focuses on utility companies. Generally as interest rates fall, utilities do better. HMAX is financial services, insurance, lifecos. Falling rates not necessarily good for them, because they're more sensitive to interest rate cuts for a slowing economy with prospects of a harder landing.
So, if rates are coming down due to an economic slowdown (as he believes), then ZWU will probably outperform HMAX in the short run.
ZDI uses the MSCI World Universe International Developed Markets index, which does not include exposure to South Korea. VIDY uses the FTSE series, which does include South Korea. That's the main difference, along with a slight difference in MER (ZDI slightly more expensive).
Focus on the exposure, not the MER. You have to make a call whether there are enough good dividend-paying stocks in South Korea to want to choose VIDY. Remember, these dividends don't get preferential tax treatment, it's all income. So if you're looking for income in your taxable portfolio, you get a much better tax experience with capital gains from the covered call overlay.
ZDI uses the MSCI World Universe International Developed Markets index, which does not include exposure to South Korea. VIDY uses the FTSE series, which does include South Korea. That's the main difference, along with a slight difference in MER (ZDI slightly more expensive).
Focus on the exposure, not the MER. You have to make a call whether there are enough good dividend-paying stocks in South Korea to want to choose VIDY. Remember, these dividends don't get preferential tax treatment, it's all income. So if you're looking for income in your taxable portfolio, you get a much better tax experience with capital gains from the covered call overlay.
Look at the Global X (formerly Horizons) series of total return ETFs. Gives you exposure to international benchmark markets very tax-efficiently. Helps you avoid foreign withholding tax. Excellent strategy for taxable accounts.
Take a look at ZWU, broadly diversified, higher yield than individual names. He'd much rather have exposure to that, better profile for income seekers.
Both TRP and FTS have rallied significantly, so it's not favourable from a risk/return standpoint. He buys into corrections and weakness instead.
Take a look at ZWU, broadly diversified, higher yield than individual names. He'd much rather have exposure to that, better profile for income seekers.
Both TRP and FTS have rallied significantly, so it's not favourable from a risk/return standpoint. He buys into corrections and weakness instead.
This version is not currency hedged. If you're thinking of the next number of years and where the CAD is today, it might be weaker until the upcoming potential downturn in the next 6-12 months.
He'd look for exposure to the S&P 500 long term, but use a currency-hedge strategy ETF. Vanguard and iShares both have those, competitively priced.
They trade in Canadian dollar value units, so there's a currency translation involved. This isn't his area of expertise. He doesn't use Canadian-listed US securities, but just goes right to the US listing for liquidity in trading purposes.
When he invests, he separates the currency and the security. Now, as an institutional investor he can hedge individual stocks like a MSFT, but individuals cannot. That's why CDRs and the like have come into being.
You're not hedging currency when you buy CDRs on the Canadian exchange. You get the currency equivalent, but you don't have to change your money into foreign currency and back again.
Franklin ETFs in the US are great, low-cost, country-based ETFs. He uses those, ticker starts with "FL". He really likes them and uses them for tactical opportunities. When you buy Germany, you're buying a lot of tech and consumer cyclical; so it's very concentrated, not unlike the US market.
Japan is a unique animal these days in terms of recovery from massive depression and changing interest rate policies. A buy on dips, more dips coming with the carry trade unwinding and currency volatility. Whether you buy Japan hedged or not will matter a lot to your ultimate return. Typically when Japan's doing really well and they have a period of massive currency depreciation, at some point we'll get the other side of that; so you want to be hedged on your currency exposure.
You have to think about your CAD/US rate, plus USD versus those international currencies. Lot of moving parts.
Market pricing in a US recession?
Last Monday's meltdown was frustrating, because you couldn't trade anything in Toronto on the Civic Holiday. He expected markets, after a shock like that, to bounce. And they did. He's not convinced that it's the beginning of another leg up. Lots more volatility to come. Calls for an emergency Fed cut were just crazy; a gap down of 20-25% may have made the case. No real credit stress to support such a move.
What is the market volatility telling us now? If you believe that it means recession, not just leverage being unwound, slowing economy, and Fed cutting cut rates, then equity markets are still grossly overvalued.
Look at a chart that tracks the S&P 500 along with times of recession. If you look at EPS on a trailing basis, when we go into a recession, EPS turn down. Always. The only questions for discussion are how much and for how long? Not "if". It's going to happen.
Another chart shows forward-based earnings expectations for the S&P for the current year, 1 year out, and 2 years out. Expectations going out show expectations of 10%, 13%, and 8% over the next 3 years. There's a recession coming. Those numbers aren't going to happen. Such a chart only makes sense if the Fed gets the calls perfect. At best, we go sideways.
There's no way with the most aggressive tightening cycle we've ever seen, and the whole rebalancing of the world, that this is a perfect outcome. Caution is still the message. Don't chase. Don't run out and buy the dip. If you're a day trader, that's all well and good. But if you're thinking long-term, strategic, you want to be defensive. Markets are very fully priced, rich, priced for perfection.
Months ago, he shifted his entire portfolio from public markets to private. Over the next year or two, the ride in the private markets will be much more friendly for returns than in the public space.
See his blog today for more details. If you look at history, the average bear market correction in a recession is 29% for the S&P 500. In 2022, we got a 20+% correction, but there was no recession. Many people think we're going higher, but he's not in that camp. Be defensive.
