While waiting for major US technology stocks to pull back, portfolio manager Guy Lapierre is putting his clients into two exchange traded funds that he says will profit from the basic demand for the necessities of life.
When he spoke to Investor’s Digest last spring, PI Financial vice-president and portfolio manager Guy Lapierre noted his pleasant surprise at surging US stock prices, buoyed particularly by technology stocks.
Since then, his thinking has shifted steadily toward a more defensive mode. “When bull markets have a long run to them, you reduce the risk in them. Don’t believe the hype,” says Mr. Lapierre, who is based in Vancouver.
The portfolio manager says that technology stocks became substantially riskier as prices rose, adding to the likelihood that their inevitable fall will come sooner than later. For example, shares of Apple Inc. (NASDAQ—AAPL), a frequent favourite of Mr. Lapierre (among multitudes of other investors), continues to trade at and make new all-time highs. “We’re looking at going back and harvesting . . . those sorts of gains,” he says.
However, the portfolio manager advises against pulling money out of the market outright and keeping cash only. Instead, he has recommended that his clients trim their risk by claiming gains from stocks like Apple and Dollarama Inc. (TSX—DOL) but continue adding to value positions.
“I’m not wary of recession. Instead of worrying about a recession, we plan for it.” After selling Apple shares over the last three to four months, he opted to invest those profits in fixed-income investments such as Air Canada’s corporate bond maturing in 2022, which pays a 4.5 per cent yield to clients at present.
Mr. Lapierre says he intends to take advantage of rising interest rates by cashing in other fixed-income investments and moving that money into major US technology stocks when they do pull back.
Investing in water utility stocks
In the meantime, the portfolio manager explains: “We would like to hold things that people have to do.”
Mr. Lapierre’s first ‘best buy’ choice, Claymore S&P Global Water Index (NYSEARCA—CGW), hews to that strategy, relying on the beloved ancient pastime of drinking (water) and, by extension, the growth of food.
The ETF, which falls under the umbrella of Guggenheim funds, is made up of 25 underlying water utility stocks around the globe. As of late July, shares were up by about 18 per cent year-to-date.
Although Canada has long enjoyed an abundance of clean fresh water, drier jurisdictions have had to develop and adapt new technology to grow food.
The portfolio manager notes that Israel has installed drip irrigation across the country, keeping agriculture there lush and green despite its hot and arid climate.
“It’s literally a driver of economic activity in Israel. We look to see this expanding across the globe,” he says, noting that much of the land in the western US, from California to Texas, has similar terrain and weather to Israel. In addition, they suffer from the same factors that have historically weakened local water supplies, such as erosion, Mr. Lapierre says. “They just can’t spray water into the air the way we do in the Okanagan.”
This ETF’s strategy does not assume that the federal US government will deliver on its promises of infrastructure spending, instead diversifying among many thirsty global regions. Although the sector could be an even more profitable investment if projects go ahead in the US. “We are in the late stages of a bull market, and high-profile politics in the US doesn’t help at this time.”
Investing in Germany’s growth prospects
Mr. Lapierre’s second ‘best buy’ selection and even, in a sense, the reasoning behind his pick, similarly sidesteps the United States: iShares MSCI Germany ETF (NYSEARCA—EWG).
The ETF tracks the performance of the German stock market, which is up about 16 per cent year-to-date, as tracked by the MSCI Germany Index.
The portfolio manager says his bet is based on Germany’s growth prospects. He describes Chancellor Angela Merkel’s decision to open the country’s doors to immigrants, particularly Syrian refugees, as “a stroke of economic genius in an economy with an aging population (and) an unsustainable social safety net”.
Mr. Lapierre argues that bringing in droves of young, job-hungry people will drive economic activity. “Higher population means higher consumption and production, government services, and investment and higher GDP as a result,” he says.
Native-born Germans’ tendency to save money dampens growth in the country, he adds. “You give 100 euros to a young immigrant family with two kids, they’re buying food.”
The portfolio manager predicts that Ms. Merkel will win the federal election in November. “That bodes well for the German economy,” he says, especially considering trends in the UK and the election of fellow moderate President Emmanuel Macron in France.
This is an edited version of an article that was originally published for subscribers in the August 11, 2017, 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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