Brian Belski is wildly optimistic about the future for the stock market.
Just not necessarily the near future. And not necessarily the Canadian stock market.
In his first interview with a Canadian newspaper since being named BMO Nesbitt Burns’s new chief investment strategist this week, the well-regarded Wall Street veteran marked his arrival on Bay Street with a message that long-suffering equity markets are headed for a “multiyear” bull run. But don’t count on it starting this year.
“We’ve had a nice run in stocks, from the lows in August,” he said. “We think there’s a very good chance the U.S. stock market has potentially already seen its highs this year, or very close to them.”
Mr. Belski’s 2012 target for the U.S. benchmark S&P 500 index is 1,425 – a thin 1.8 per cent above Thursday’s closing price of 1,399.98. The index’s high for the year to date is 1,419, reached earlier this month.
Based on the pattern during the past two years of market recovery, he thinks the market looks susceptible to a selloff should the unforeseen occur – such as escalating debt crises, weakening U.S. economic numbers or unrest in the Middle East.
“Quite frankly, in the past couple of years [the market]has not dealt with [such troubles]very well after rallying in the beginning of the year,” he said.
But looking beyond the current market cycle to the longer term of next decade or so – the so-called “secular” trend – “we’re very bullish” on equities, Mr. Belski said.
“What we have seen in the United States the past 10 or 12 years is a tremendous amount of structural change. Corporate America decided to get their acts straight,” he said. “They paid down their debt, they rebuilt their balance sheets thanks to low interest rates, they started to pay dividends, they started to buy back stock, they took out capacity. … That kind of structural change has, we think, positioned corporate America, and therefore U.S. stocks, to take the lead in terms of investing going forward.”
He added that as interest rates slowly recover from historic lows, stocks look set to supplant bonds as investors’ favoured asset class.
“The last 30 years have been dominated by bonds. In the last 10 years in particular, it’s been the best-performing decades for bonds versus stocks since the 1930s,” he said. “What historical analysis tells you is that following periods of decades of [equity]underperformance, it ushers in multiple decades of equities outperforming bonds. That’s where we’re going.”
But the market isn’t quite there yet, he cautioned.
“We’re in this transitional period; we’re working through all this silliness of momentum, still trading through emotion, we’re not using fundamentals because we’re acting in a defensive manner because we’re coming out of a bear market,” he said. “All of that is beginning to be washed out of the system.”
But the new secular bull might not be as fond of Canada’s economic-growth-sensitive, resource-heavy market as the last secular bull was, he cautioned.
“On a secular basis, bull markets are really defined by new leadership,” he said. “The last bull market was clearly [led by]emerging markets, commodities, small cap, low quality and high beta. We think the new secular bull market will be led by high quality, lower beta, consistency, stability of earnings. That points us initially to U.S. large-cap stocks.
“Now, does that mean these [commodity-heavy]areas in Canada are not going to do well? Absolutely not. We just think that they’re not going to see the type of momentum that they’ve enjoyed in the past 10 or 12 years on the positive side – or on the negative side. I think the entire theme for investing in the next five to 10 years has to be consistency and stability.”
And what might kick-start this secular bull? Mr. Belski thinks it might require a U.S. government commitment to tackle its own debt problems – something that won’t be addressed until next year at the earliest, when the presidential election is out of the way.
“If you take a look at how economies work, there’s sort of three pillars: There’s corporate America, there’s consumer America and there’s the government. Two out of the three have already shown signs of structural change. … Now we need to see structural change in the government side of things. From a longer-term perspective, that’s the major catalyst.
“I think we’re kind of mired in a trading range for a while until we start to see substantive change out of Washington.”
Chief investment strategist, BMO Nesbitt Burns
Based in: New York and Toronto
Responsibilities: Canadian and U.S. equity portfolio strategy
Hometown: Willmar, Minn.
Years on Wall Street: 23
Most recently: Chief investment strategist at Oppenheimer & Co., New York
Bay Street buddy: Worked closely with Gluskin Sheff's David Rosenberg at Merrill Lynch