Don Coxe, the respected market strategist and historian, is advising investors to cut back their equity allocations, boost bond exposure and stay clear of blue-chip dividend stocks when searching for income.
His latest recommendations were just published in The Coxe Strategy Journal, a quarterly publication that was launched earlier this year. More than a year ago, Mr. Coxe, an adviser to funds including the Coxe Commodity Strategy Fund and the Coxe Global Agribusiness Income Fund in Canada, stopped publishing his lengthy market letter called "Basic Points" after more than 20 years.
But the 78-year-old, citing a desire to return to doing more writing and strategizing for institutional investors, is back with The Coxe Strategy Journal, dispensing his market views alongside a distinctly conservative political philosophy.
The new publication outlines separate recommendations on allocations for both Canadian and U.S. pension funds.
You can click here to see an infographic of his latest recommendations for his Canadian pension fund portfolio. Overall, he's cut back his allocation to equities to 36 per cent from the recommended 40 per cent in January, while boosting fixed income suggested allocation to 35 per cent from 31 per cent.
In his view, the stock market is not wildly overvalued, and there's comfort in knowing that the bloated levels in Nasdaq valuations have been moderated without triggering an overall selloff. "That kind of internal pruning of excesses is a sharp – and reassuring – contrast to 1999," just prior to the tech bubble bursting, he said.
But he thinks a modestly heavier weighting towards fixed income versus stocks is now warranted. He increased his recommended exposure by 3 per cent, and suggests investors modestly extend duration – moving to more longer-term bonds. While longer-term bonds can take a bigger hit if interest rates rise, he thinks it's a wise move to make as longer duration bonds will deliver better returns if there is a significant stock market correction. Wth inflation showing signs of bottoming, he suggests maintaining exposure to inflation-hedged bonds.
Mr. Coxe previously recommended blue-chip dividend stocks as a component of income investments –- but no longer. He feels dividend equities, an integral part of value investing, may be a little too popular. "We do not recommend them at this point, given the elevation of the S&P and the recent signs of creeping acrophobia among value investors," he said.
Mr. Coxe outlined 13 investment recommendations. Here they are verbatim.
"1. Investors should reduce exposure to American equities.
2. Bonds are hardly bargains, but they have performed well year-to-date. Given the negative bank stock indicator, now is no time to be reducing bond quality. Durations should be increased in balanced accounts.
3. The Canadian dollar, once prized, is now seemingly friendless. Don't short the loonie here, no matter how many brilliant people tell you that's what you should do.
4. Buy oil sands-related stocks. For more than a year we have not believed that Keystone would be approved. We now think it could happen in less than a year. Why? Because if – as the polls suggest – the Republicans win the Senate, they'll make approval of Keystone a condition precedent to any budget deal. Moreover, the Democrats will have cashed all those checks from Tom Steyer and the other rich liberal donors so they can flutter their eyelashes at their backers and sigh that they had to accede to the inevitable.
5. The best-performing commodity stock group this year has been oil and gas, and within that big sector, since Russia flexed its imperialist muscles, the biggest winners have been gas producers. Result: Most of the hottest natgas stocks now have a greater political content in their valuation than any oil sands stocks. If Russia decides it cannot realistically expect to get more by squeezing Ukraine, then the current enthusiasm for Canadian gas exploration stocks could fade briefly. However, the longer-term outlook for LNG is so bright that any Putinesque-Pullback would be a significant buying opportunity. Gas-related companies, such as drillers and pipelines are also attractive.
6. Investors should maintain exposure to precious metals and keep a weather eye for storms. Gold prices no longer include any Putin pricing factor. Investors and speculators have collectively decided that gold is not so hot unless the economy gets hot enough for the CPI to rise, or it gets soft enough that tapering is taken off the table. Gold is once again at a bargain price for anyone who still believes that the towering trillions of newly-printed money must inevitably trigger inflation. Friedman's "Money matters most" has been restated as "Money matters not at all." Friedman will win again.
7. As for other precious metals-related stocks, the platinum and palladium sectors are benefiting from the prolonged strikes in South Africa – which currently show little sign of ending. They are the only precious metals whose prices are positively correlated to economic activity, which means you have at least two ways to win.
8. The world is clearly riskier and more troubled now than when we last published. NATO's European members have had their complacency rudely interrupted. Japan is probing for ways around the Procrustean MacArthur rules of peacefulness. Defense stocks will soon be back in vogue. Emphasize those that had the most to lose from perpetual peace, rather than those that prepared for potential irrelevance by becoming very successful in civilian products and services.
9. Japan is disappointing global investors again. Abe's latest bad behavior is not a trivial matter. We had also not expected the Bank of Japan to revert – however briefly – to the cautious monetary policies of the past. Underweight Japan – but don't abandon this U.S. ally just yet.
10. The seeds are going into the ground as this goes to press. The USDA is predicting a near-record corn crop. What can go wrong? Answer: In November, the USDA also predicted that Ukraine would be this year's biggest wheat exporter and third biggest corn exporter. Let's just see how the political weather blows – and what an El Niño could mean for US crops.
11. As Nasdaq neared its all-time high this year, we recalled the Anaerobic Era (1998-2001) and concluded this is not a carbon copy. But there are enough similarities to make us skeptical that the sky-high multiples will be justified – and convinced they won't survive a stock market correction.
12. Euro zone stocks have been outperforming U.S. stocks. The stocks and bonds and banks of the euro zone have been displaying the enthusiasm of little Jack Horner as he pulled out the plum. The Euro zone and its member PIIGS are currently exceeding previous expectations – but not, apparently the current expectations of euro bond buyers.
Some European bankers who have been bailed out once have apparently been buying Spanish, Greek and Italian bonds at yields ordinarily available only to those who have never had to give buyers a discouraging word. If those bond buyers aren't punished in this life, they may face Sisyphean punishment in the next. Avoid their Fate.
13. India is back! Despite concerns about Modi's past, the rupee and the Sensex are performing impressively. Among the sectors of the Indian stock market worth consideration are – obviously – the tech sector, but there also interesting are the few well-managed banks, and chemical, oil and gas companies. We suspect that Modi's momentum will continue for quite a while."
Darcy Keith