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Sadiq Adatia of BMO Global Asset Management.The Globe and Mail

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September is traditionally a tough month for financial markets and this year will likely be no exception if the volatility in August is an indication, says money manager Sadiq Adatia.

But the chief investment officer at BMO Global Asset Management says the rest of the year could bring strong returns for certain companies or sectors that may have sold off in recent months.

“We could have a healthy fourth-quarter rally,” says Mr. Adatia, whose firm oversees about $160-billion in assets, of which he manages about $20-billion directly.

Mr. Adatia is still cautious, expecting a mild recession to hit in early 2024. That’s why his team is adding more defensive stocks in sectors such as health care, industrials and gold to try to protect investors’ wealth.

He points to BMO Equity Growth ETF Portfolio – Series F, which increased 10.1 per cent year-to-date, 13.9 per cent during the past 52 weeks, and has an annualized five-year return of 6.7 per cent. The performance is based on total returns, net of fees, as of Sept. 1.

The Globe and Mail spoke with Mr. Adatia recently about his take on the markets and some sectors his team has been buying and selling.

Describe your investing style.

Our focus is on risk and reward. We try to maximize returns for our clients based on their risk profile. Our goal is to consistently outperform the markets over time. We’re not taking massive bets in the portfolio. We’d rather win by having singles and doubles versus going for home runs.

What’s your take on the current market environment?

The economy has been very resilient, thanks to the consumer. Early this year, the expectation was that we would have seen a recession by now, based on a belief that the consumer would have been hurt by higher inflation and interest rates. That hasn’t really happened in large part because the job market has remained strong. However, we saw some pressure on consumers in the latest round of corporate earnings and a slight increase in delinquencies on credit cards and small businesses. We expect to see a soft landing or mild recession at some point in the first or second quarter of next year, but nothing as significant as was expected earlier this year.

What’s next for interest rates, in your view?

Inflation has come down a lot, but not to levels that central banks are happy with quite yet. So, that means there is a possibility of more rate hikes in the future. Then, rates will probably be paused for an extended period.

How are you investing based on this outlook?

We started the year a bit more defensive with higher positions in bonds and cash, but moved to a more balanced mix of bonds and equities after realizing quickly that the consumer would be a lot stronger than expected.

We were overweight on our technology position at the start of the year, which was very beneficial given the big run-up in that sector. We’ve gradually pared back on technology after taking some profits, but we still have exposure to quality companies in the space.

With resources, we’re thinking about increasing our energy position again, believing that current valuations don’t reflect demand. We were overweight energy in 2021, based on the anticipated boost in demand from the people coming out of the pandemic lockdowns and the supply shortage. The crisis in Ukraine that started in early 2022 also helped push oil prices higher. We then pared back our energy holdings in the first quarter and are now looking to add some back. We have also been trimming our gold exposure. The U.S. dollar has been strong, which is a negative for gold. But we still own it for its defensive qualities.

We’re also looking at opportunities in health care, banking and industrials. The banking sector has been hit hard, so valuations are low. There’s a cloud over the sector with higher loan loss provisions and the impact of high interest rates on the consumer, but we think that’s now priced in. Dividends and balance sheets are strong and we believe the banks are a good long-term play.

In industrials, we’ve been adding names in the defence sector given the growing geopolitical risks and desire by governments around the world to spend more on protecting their citizens. Defence isn’t necessarily a cheap sector, but it has good tailwinds behind it.

Is there a sector you wished you owned more of today – or didn’t sell?

I wish we stayed more heavily weighted in technology. The artificial-intelligence (AI) theme took a much bigger focus than expected, and I think it will be a long-term trend. It may be overhyped at the moment, but I don’t think people fully understand the capabilities AI will bring to businesses in the future – from cost reductions and efficiencies to revenue. And, then probably things that we haven’t even thought about yet.

What advice do you have for new investors?

I recommend owning a diversified and balanced portfolio instead of trying to pick a few stocks you think will work. Also, be patient and invest for the long term. We’ve seen a few examples in recent history where people pull out of the markets when they’re down and miss the recovery, which can sometimes happen quite quickly.

This interview has been edited and condensed.

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