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Some investment managers are focusing on ensuring client portfolios own the highest quality companies with the strongest fundamentals.Spencer Platt/Getty Images

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It’s been a tough year for most investors, with major stock indexes falling by 20 per cent or more, while fixed income investments have also fared poorly. The losses have led many investors to reconsider their strategies and asset allocations.

While some strategists and advisors are getting defensive during this market downturn, others see it as an opportunity for future gains.

“At this point in the economic and market cycle, we are advocating a very balanced strategy,” says Philip Petursson, chief investment strategist at IG Wealth Management in Toronto.

He notes bond yields have moved substantially higher in the first half of the year and are now offering attractive rates. He feels the risk of greater downside in bonds is much lower today than at the start of the year.

Mr. Petursson adds that it’s “still not clear” the U.S. economy is heading toward a recession – and the more likely scenario would be flat economic growth to a short and shallow recession. As a result, he and the team at IG Wealth have a positive outlook for equities over the next 12 months. The firm favours a slightly higher weighting to Canada, international and emerging market equities over the U.S. for the coming year.

When it comes to specific investing strategies for a down market, Mr. Petursson says he’s more focused on value versus growth positioning.

He notes stocks with lower price-to-earnings ratios have been outperforming growth this year, and he feels growth stocks are not yet cheap enough to warrant an overweight given the potential for continued economic slowdown or recession.

Not shying away from stocks

Despite the tough year for markets, some advisors are still proposing large equity weightings – and preparing to add more.

Maili Wong, senior wealth advisor and senior portfolio manager with the Wong Group at Wellington-Altus Private Wealth Inc. in Vancouver, says that in this uncertain economic environment, with rising interest rates, inflation and economic turmoil, she is advising a diversified portfolio of approximately 75 per cent dividend-paying equities and 25 per cent fixed income and liquid alternatives.

She says the main goal of this weighting is to provide steady cash flow while waiting for markets to recover from the recent downturn.

Ms. Wong also notes that in the past six months her firm has taken a more defensive position with many client portfolios, managing risks to tilt portfolios toward high-quality companies with strong balance sheets, low debt, and steady cash flows that they often distribute as dividends.

“These dividends can help our clients get ‘paid to wait’ for the markets to recover,” she says.

Ms. Wong says her firm is also getting ready to start adding risk back to client portfolios. She notes sentiment indicators are at all-time lows, and valuations look compelling with good companies trading at a 20 to 50 per cent discount.

“As a fellow portfolio manager put it, ‘The market is the only store in which customers run out screaming when there is a big sale,’” she says.

Focusing on fundamentals and profitability

Some investment managers are focusing on ensuring client portfolios own the highest-quality companies with the strongest fundamentals.

“We have been ‘high-grading’ our portfolios since January 2021,” says Brianne Gardner, wealth manager and financial advisor with Velocity Investment Partners at Raymond James Ltd. in Vancouver.

“We recognized that stocks were overdue for a correction, with valuations high. We wanted to make sure that if things did turn sour, we owned stable, profitable companies with strong cash flows and solid balance sheets that could weather the storm.”

Ms. Gardner’s group currently prefers Canadian over U.S. stocks and is overweight on health care, financials, industrials and energy. She says her firm favours these sectors based on fundamentals, valuations, demand trends, pricing power and earnings outlook.

She notes that as interest rate increases slow, and the probability of rates dropping back down increases, they will look to add back more large-cap technology exposure.

When it comes to fixed income, Ms. Gardner says her group has an underweight position as bonds have performed “terribly” over the past 18 months, as interest rates rose.

Her firm tells clients to consider alternative investments such as private lending, private equity investing, private debt, and venture capital. She notes these assets can have low or no correlation to traditional markets, and may also offer investors access to an expanded set of market opportunities.

Ms. Gardner believes the current pullback is an opportunity that will come to fruition over the next six to 18 months.

“The market is pricing in the worst, with stock valuations taking a huge hit all while corporate earnings remain strong,” she says. “This is pushing valuations to multi-year lows and also means there are some great bargains out there which, we have been taking advantage of and patiently waiting on others.”

Meanwhile, for Lyle Stein, president of Forvest Global Wealth Management Inc. in Toronto, the key issue to think about at this time is duration. He notes the four-decade tailwind for investments provided by the general decline in interest rates is now over.

He adds that the longer the life of the asset, the more sensitive its price is to changes in interest rates.

“Are we bearish on equities?” he asks. “No, there are always pockets where one can make money. In a rising rate market, however, the pockets are just fewer.”

As a result, his firm favours dividend-paying, value stocks that reward investors right away rather than growth plays. He also notes that in this rising rate environment, investors should forget about bond funds.

“Fixed income could continue being a fixed loss,” he says.

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