Canada’s best-known bear sounds almost bullish when he surveys the investment scene for 2013.
In an uncertain post-bubble world where the range of possible outcomes is remarkably wide, the best thing investors can do is diversify broadly across asset classes, make fewer concentrated bets and put idle cash to work, David Rosenberg, chief economist and strategist with Gluskin Sheff + Associates Inc., says in his outlook for 2013.
“In a market like this you want to be nimble,” Mr. Rosenberg said in an interview.
In a zero return environment, “cash is not king,” he says in his analysis, which will be released Wednesday. “What is king is cash flow, however.”
The U.S. economy will post anemic growth in 2013, he predicts, but will manage to avoid falling back into another recession, as Washington stops short of plunging off the “fiscal cliff.”
The earnings picture, though, will remain muddled, and revenue growth has evaporated, he said. The near-term outlook for corporate profits “is still spotty at best. But balance sheets in North America are in phenomenal shape.” As a result, he favours corporate bonds and credit arbitrage plays over a large swath of U.S. equities.
Almost 80 per cent of outstanding corporate debt is locked in at low rates. And even in a sluggish economy, default rates are sitting near 3 per cent, well below the historical norm of closer to 4.5 per cent.
Mr. Rosenberg still favours dividend-paying stocks as a source of relatively secure income, including the Canadian banks and even large-cap U.S. tech companies, “where growth in dividends is second to none.” His diversified shopping list also includes emerging market equities and bonds, gold stocks, other precious metals and oil, in part because he believes China has successfully engineered a soft landing. “It’s one of the big, unheralded success stories of the year. I’m much less worried about China than I was a year ago.”
The Canadian economy has slowed in tandem with a weaker global economy. But it remains in better shape than the U.S. “There are things happening on the supply side of the Canadian economy that actually have me, shall we say, feeling a little bit more bullish,” he said with a smile.
Mr. Rosenberg labels cash “the pain trade” for the next few years, because of the Federal Reserve’s unprecedented vow to keep interest rates effectively at zero until U.S. unemployment falls to 6.5 per cent from its current level of 7.7, provided inflation creeps no higher than 2.5 per cent. The jobless rate is unlikely to decline that much in a soft economy before 2018, and deflation remains a far bigger risk than inflation, because “the world is still awash” in excess capacity, he says.
Investors would be wrong to ignore such a powerful signal, he said. “It’s nice to know that the Fed is going to be keeping short-term interest rates at zero not just for the next few months or the next few quarters but the next several years.” What the central bank is saying is that “if you are so acutely risk-averse that you’re going to be in cash or cash-like instruments, we will subject you to negative real returns for you and your family for the next several years,” he said.
“And whether you’re a bull or a bear or agnostic, that, to me, is no investment strategy at all.”
Retail investors in the U.S. have parked more than $7-trillion (U.S.) in cash or equivalents, and Federal Reserve Chairman Ben Bernanke is determined to steer part of that hoard into productive investments.
Mr. Rosenberg cautions that investors should not dial up their risk tolerance dramatically. But he adds that “we have to continue to be creative in generating relatively secure cash-flow streams.”