The global economic recovery has hit stall speed, boosting the case for defensive stocks and gold, says a hedge fund manager who was one of the few to make money during the 2008 global market meltdown.
"I think we have already started a global recession," warns Nandu Narayanan, who oversees more than $500-million (U.S.) in assets as chief investment officer of New York-based Trident Investment Management LLC.
Prospects for U.S. growth have "gotten distinctly worse," he said. "Europe is definitely slowing down, and most of the emerging-market countries are also facing inflationary pressure issues so they are tightening."
While Mr. Narayanan may not be a household name, he is known for his early bet on the 2008 U.S. housing and financial crisis. His CI Trident Global Opportunities Fund, which he runs for CI Financial Corp., earned nearly 44 per cent that year, while its peers lost an average of 18 per cent.
Mr. Narayanan said his bearish outlook on the economy leads him to prefer defensive stocks in areas like consumer staples, pharmaceuticals and water utilities. He also likes integrated oil companies that will continue to enjoy decent sales even in a weak economy.
He believes that higher-quality "boring companies," such as Johnson & Johnson and Procter & Gamble , have been ignored in the runup of the past three years and should do well as investors seek companies that can expand in tough times. "When growth is scarce, people bid up stocks that have a good dividend and good business models."
Gold stocks are also "absurdly undervalued," said Mr. Narayanan, who has over 10 per cent of his funds in gold equities and bullion. "They haven't even kept pace with gold over the last four or five years."
The manager, who predicted in 2009 that gold would soar past $1,000 an ounce, remains bullish on the metal. It now trades at around $1,643 an ounce after retreating from a record high of more than $1,900 last month. "Gold can easily go to $2,500 an ounce" as investors flock to it as a store of value when countries like the United States are printing money and devaluing their currency, he said.
He is also invested in bonds of "highly solvent" countries like Canada, Norway and Australia largely through derivatives like options. And he owns corporate bonds from developing countries like those issued by Chinese oil companies and State Bank of India.
He has warmed up to the Canadian stock market because of its strong resource component, particularly in the energy sector, and Canada's well-regulated banking system.
In the longer term, emerging stock markets are compelling because developing countries are growing faster than developed ones, and many emerging nations are in better fiscal condition than their Western counterparts, he said.
Mr. Narayanan's strategy seems to be working this year as his CI Trident Global Opportunities Fund rose 6.5 per cent for the first nine months while markets were mired in the red. The go-anywhere fund has earned an annualized 11.2-per-cent return over the past 10 years versus a 0.5-per-cent loss for the MSCI World Index in Canadian dollars.
Dan Hallett, a fund analyst at HighView Financial Group, described Mr. Narayanan as a "skilled manager," but cautioned that it can take several years before his bets pay off like they did in 2008. "His performance has been good, but very lumpy [with small losses in 2009-10] You have to be patient."
Mr. Narayanan said his losses in 2009 and 2010 came about because he "miscalculated" the amount of stimulus that the United States and European countries were willing to throw at their economic woes. "We were unwilling to get aggressively invested," he said. "Our view is that the house is burning. We are not going to go near it."
ETF picks for a slowing global economy
SPDR Consumer Staples ETF
This ETF owns multinational companies like Proctor & Gamble, Kraft Foods and tobacco giant Philip Morris. "We think that in a slow-growth environment they will do the best," Mr. Narayanan said.
iShares MSCI Canada ETF
The Canadian market is attractive because of its strong resource sector and well-regulated banking sector, he said.
iShares MSCI Emerging Markets ETF
Investing in the emerging markets with their fast-growing economies is "money in the bank" over five years, he said.