It’s not easy being a market bull these days. The economic data range from mildly positive to downright depressing, often at the same time.
The main takeaway is for plodding growth at best and a sequel to the Great Recession at worst. Profit forecasts are plunging almost as fast as commodity prices. Policy makers continue to blunder their way to the edge of the cliff in Europe and the U.S. No one knows whether the Chinese will push the stimulus buttons again; and waiting for central banks to ride to the rescue seems like a lousy investing strategy.
Uncertainty reigns everywhere, and it’s showing up in delayed investment decisions, jittery markets and ebbing confidence.
When asked in late April about the outlook for Canadian corporate earnings growth this year, a respected economy watcher put the figure at about 7 per cent, before taxes – less than half the healthy 15 per cent of 2011, but still better than nominal GDP growth. Within weeks, he had lowered his estimate to 5 per cent.
In Germany, the last bastion of expansion in the euro zone, business confidence has fallen to its lowest level in more than two years. The economy grew by a sickly 0.5 per cent in the first quarter and may now be shrinking – which ought to be enough to persuade Germany’s chief dietician, Angela Merkel, that her austerity diet for the rest of the euro area (which accounts for 40 per cent of German exports) is now giving her own country a severe case of heartburn.
Against this murky backdrop, more than a few money managers are cutting back on equity positions, reducing bond exposure and loading up on cash. Equity types of a conservative bent are still extolling high dividend-paying stocks with long track records. And some of the value crowd are trolling for beaten up bargains in Europe and the emerging markets. But famed bond fund manager Bill Gross tweeted that this is a bad time to be stuck with a lot of risk assets.
It’s a safe bet, though, that most pros have no intention of simply abandoning stocks altogether, even if their mandates allow such a move. Yet that is exactly what Murray Belzberg has chosen to do.
It’s not the first time the president of Perennial Asset Management has hastened to the sidelines to avoid market gales. This time, the Toronto-based money manager has reduced equity exposure to a single long position amounting to less than half of 1 per cent of the firm’s portfolio, while shorting another dozen stocks, accounting for about 24 per cent of assets. The company has also dumped all of its long-dated government bonds in favour of treasury bills.
It’s “a very unusual position,” Mr. Belzberg acknowledges. On a hot, muggy day, he seems decidedly cool and calm about his maverick bet. “It’s a statement of ours that we expect quite a large correction.”
Hence the big short. “We think the market is going to go quite a bit lower over a longer period of time. Nothing ever moves in a straight line, so there will be times when you might want to buy stocks on the long side for a short period of time. But in general, our view is you’re going to need to be willing to short regularly for the next couple of years.”
Meanwhile, he has no intention of loading up on big dividend stocks or on Europe’s unloved multinationals.
European-based companies with global market reach and strong balance sheets may weather the upheaval quite well. But they are still captive to economic and market conditions in their home bases. “What are governments going to have to do in order to try and survive? They’re going to have to tax higher. They’re going to have to find people that will pay. … So it’s going to come out of some of the multinationals.”
But surely the blue-chip dividend stocks remain a relatively safe way to wait out the storms. Doesn’t that beat sitting in cash earning nothing or paying the Germans or Swiss to hold your money?
“There is a lot of truth to that,” he cheerfully agrees. But you just know there’s a big ‘But’ waiting in the wings, and it doesn’t take long to make an appearance.
If his market call is right, these stocks will not be immune. “They may not go down as much [as the rest of the market]. But it wouldn’t take much to see those stocks decrease by 10 or 12 per cent and then the real question is: What was the benefit you got by doing that? Most of the valuations I’ve seen show that those companies are trading at very high multiples … because everybody has been dealing with that same issue [of heightened risk and volatility].”
On the fixed-income side of the aisle, he agrees that “selling long [government] bonds carrying a 2.6 per cent yield and taking T-bills that in Canada yield close to 1 per cent and in the U.S. 0.1 per cent doesn’t sound like a really good idea from an investment standpoint.” Unless, that is, you think it’s important to keep your powder dry so you can capitalize on inevitable market dislocations.
“That’s what you have to do in this market,” Mr. Belzberg insists. “We think people should be accepting low interest rates and standing on the sidelines, because there will be opportunities out of market volatility.”