The very fact that so many investors and market observers are worried about a dramatic reversal in stock prices is actually a source of comfort, according to Sentry Investments' Gaelen Morphet. After all, seldom are crashes foreseen by a substantial portion of the investing community, she said. On the contrary, major market episodes are typically preceded by extraordinary optimism. "I know what it feels like when you are in a frothy and speculative market. I don't feel that right now," said Ms. Morphet, who recently stepped into the role of chief investment officer at Sentry. The following is an edited, condensed version of her conversation with The Globe.
There have been a number of bearish calls recently, focused on valuations. Do you think U.S. stocks are too expensive?
I don't believe that valuations are excessive given the backdrop of low rates. Seeing second-quarter earnings out of the U.S. – roughly 80 per cent of companies beat expectations, and it was broad-based – that gives me comfort. I don't foresee any major risks in the short term, and unless valuations are so excessive you can't find any opportunities, I believe in being fully invested.
Have there been times when you were less than fully invested?
In 2006-07, I did feel the market was overvalued, and we did go to the highest possible cash position. I also significantly reduced my exposure to resource areas, which cost us performance in the short term, but helped protect against downside when the market rolled over. And in 2000, when the market was overvalued because of technology stocks: At one point, our portfolio was over 20-per-cent behind the market because we weren't going to invest in Nortel, which didn't have any earnings. I've made those decisions in the past and I'm prepared to do that again. I just don't foresee anything in the near term to the extent that caused the market to contract like it did in those periods.
What did you take away from those episodes?
Nobody can time the market. Go back and look at what the great investors were saying in 2007 and in 2000 – even 1987. There really were very few who were prepared for those periods. In 2007, I would say there was consensus view that we were in a new paradigm for global growth. I don't see the same euphoria, I don't see the same theme-based investing going on in equity markets today.
Do you think that euphoria is needed to pose a major risk to the bull market?
I do. I try to be in tune with the emotion of the market. Right now, there are people right across the investment landscape who are concerned about valuation. I believe you don't have a market rollover until everyone is feeling the optimism. That's when investors feel there is an opportunity cost not to be invested in the market. I think there is a balance still between investors who think the market is going to go up and those who think the market is going to go down. In terms of the bond market, clearly we're in uncharted territory. But I think we're going to continue to see [downward] pressure on rates, and I don't know what will be the catalyst that turns things around. So I'm going to stay fully invested in a combination of government and high-quality corporates.
Can Canadian stocks continue to outperform?
The Canadian market has really been propelled this year by the gold sector, and most Canadian portfolios have not been big participants in that. And I don't see runaway prices in commodities. There are opportunities in other areas of the market – the banks and insurance companies. There's the opportunity for the Canadian market to continue to do well, but not necessarily with the narrowness we've seen this year.