A top-10 Canadian bank and a CAD-hedged exchange-traded fund tracking the Dow Jones Industrial Average are PI Financial portfolio manager’s current top two stock picks.
Feeling bullish? If so, Vancouver-area portfolio manager Guy Lapierre warns: “I cannot see us avoiding a sharp correction in the fall, made all the more because of the sharp recovery in January.” Mr. Lapierre is a vice-president as well as a portfolio manager and branch manager at PI Financial. A host of fundamental factors around the world, rather than concerning technical indicators or sector rotation, have driven market volatility since last October, he argues.
“I was surprised at the severity of the drop in December,” says Mr. Lapierre, noting that it was the worst since 1931. After losing six per cent that month while promising clients an annual return between six per cent and eight per cent, he quips: “Emasculation was a possibility there. The sharp drop was because no one was willing to step up and buy on a ‘dip’.”
He attributes the pre-Christmas correction to “substantial risks” on the global stage, including conflict between the US government and the Federal Reserve, trade issues between China and the United States, and unsteady currency valuations. The portfolio manager argues that these factors, among others, remain a challenge. What is more, governments and central banks have limited means (and political will) to address any imminent problems.
Structural weakness in the market
Reflecting on nearly 35 years in the finance business, he says current market conditions are closer to 1987 or 1994 than the tech bubble recession of the early 2000s or the global economic crisis in 2008. (The former two resulted from broad market weakness, while the latter two began when a specific sector did poorly and the damage then spread, he explains.)
“Essentially, my concern is that there’s structural weakness in the market.
“To me, the history here is ’87. It’s relying on earnings from a very small number of companies,” he says of the markets.
Weak spots showing in global economy
Surveying global economies and their potential for contagious glitches, he notes that India recently surpassed Italy for having the highest amount of bad loans on a per capita basis. In Europe, Italy remains crippled, and the uncertainty of Brexit still looms as well.
Meanwhile, China recently suspended iron ore shipments from Australia, Mr. Lapierre adds. “If China doesn’t buy iron ore for three months, that’s a huge hit to the Australian economy.” Of course, China’s decision not to buy as much iron ore suggests that it may produce less in 2019.
Elections in Canada and India, plus the upcoming retirement of longtime German Chancellor Angela Merkel, will result in a lack of established leadership in the case of any flare-ups, the portfolio manager further argues.
“There’s just an absence of leadership and plenty of opportunity for economic crisis. A ship will hit a rock if nobody’s driving it.”
Thus, politicians are unlikely to produce confidence-inspiring, workable solutions. Because interest rates remain very low, central banks lack the tools to respond effectively as well. “A sharp cut in the interest rate by the Federal Reserve would indicate to the market panic,” immediately achieving the opposite of its intended effect, Mr. Lapierre asserts.
Retail investors looking for exit point
He says retail investors were “exhausted” after the upheaval at 2018’s end and predicts they will leave the market when this year’s gains recede in the third quarter.
“We used the rebound in January as an opportunity to take profits or sell positions that were covered after the fall in December, he concedes. “We have reached the point of capitulation.”
Stressing the preservation of capital, Mr. Lapierre says he has shifted his clients’ portfolios toward high-quality Canadian corporate bonds.
At the moment, the mix is about 50-50 between fixed-income and equity investments. “I could be as high as 75-25 by June” if the market becomes more unstable, he says.
A top-10 bank and a CAD-hedged index ETF
Although his portfolios are increasingly defensive and Mr. Lapierre is reluctant to issue outright ‘buy’ recommendations, even for well-run, established companies (except when clients have no investments at all yet), he names two ‘best buys’: the BMO Dow Jones Industrial Average Hedged-to-CAD Index ETF (TSX—ZDJ) and Laurentian Bank of Canada (TSX—LB).
Laurentian’s dividend yields about six per cent annually since hitting a December low. Mr. Lapierre argues that institutional foreign investors have largely abandoned all but the biggest banking players here, eating into share prices, but adds that Canadian banks in general are unlikely to fail, and most will probably raise their dividends this year.
As for the BMO ETF, which mirrors the Dow’s constituent companies, the portfolio manager explains the play is meant to take advantage of US dollar strength.
This is an edited version of an article that was originally published for subscribers in the March 8, 2019, issue of Investor’s Digest of Canada. You can profit from the award-winning advice subscribers receive regularly in Investor’s Digest of Canada.
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