Macquarie Group strategist Viktor Shvets has a dire view of post-financial crisis markets, describing current investment risks as “huge" and “arguably the highest” since the 1930s or 1970s.
The ongoing equity market rally contradicts a pandemic-hit global economy, which, while recovering, has not yet fully regained its footing. Most strategists view this divergence as temporary, with the belief that a strong economic resurgence is imminent, and investors are correct to price stocks based on an expected 2021 profit revival.
Mr. Shvets has a different view, as presented in his Oct. 16 report, Hall-of-mirrors or reflexivity on steroids. He believes that easy monetary conditions and an explosion of debt has created a situation where “capital markets are now the dog and real economies are merely the tail.” While still linked loosely to the economy, markets are driven primarily by the cost of capital and market liquidity.
The strategist cites arguably the greatest investor alive, George Soros, who has frequently argued that markets and reality take different paths all the time, and it’s markets that are almost always wrong.
Mr. Shvets' perspective was more fully explored in his recent book The Great Rupture: Three Empires, Four Turning Points, and the Future of Humanity. In an interview to promote the work, he noted that developed economies are increasingly made up of intangible assets like software and pharmaceutical patents.
Unlike manufacturing, where expanding operations means building a new plant at great cost, intangible assets are replicated with no need for further capital. “In the Information Age we have limited capital requirements and we are flooded with capital,” he said.
We are approaching the limits to the financialization binge, according to the strategist, with all of the debt defaults and asset writedowns that implies. But he has no guesses as to what happens afterwards: “We are approaching a Black Hole,” he said. “What lies on the other side of the Black Hole is unknown.”
How should investors account for forecasts like these? The short answer is they can’t. Not really.
Any moves to raise portfolio cash allocations or otherwise reduce risk constitutes an attempt at market timing, and the academic evidence shows that turns out badly more often than not.
This is not, at all, to say Mr. Shvets’s perspective doesn’t have value. Investors can use the opinion as a backboard to reassess their current beliefs on the market and their holdings. Perhaps more importantly, the degree of anxiety each investor feels when reading the outlook can help them judge whether their risk tolerance was as high as they’d previously believed.
-- Scott Barlow, Globe and Mail market strategist
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Stocks to ponder
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Gordon Pape has always been a proponent of a balanced portfolio. But he says the time has arrived to rethink how we position our assets going forward. He thinks it’s worth reconsidering the traditional 60-40 stocks/bonds split and move a higher percentage of assets into low-risk, dividend-paying stocks. And he has five such stocks he thinks investors should consider. (for subscribers)
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Ask Globe Investor
Question: I am 72. My main revenue is from my RRIF. I am now invested about 50 per cent in Canada and 50 per cent in the U.S. My asset mix is U.S. equity 15 per cent, U.S. cash 33 per cent, Canadian equity 10 per cent, Canadian cash 42 per cent. Would you please comment on that spread? Is it too aggressive? Should we anticipate a significant change in the value of the Canadian dollar versus the American dollar in the near future? Thank you for your opinion. – Marcel B.
Answer: Your allocation is not aggressive at all. In fact, it’s much too conservative. Yes, these are uncertain times but holding 75 per cent of your RRIF in cash is overkill, especially when you are counting on it as your main source of income. I doubt that your equity holdings are generating enough cash flow to meet the minimum withdrawal requirements, which means you are encroaching on principal.
Here is an alternative conservative approach. Figure out how much cash you will need over the next three years and retain that amount, half in Canadian and half in U.S. dollars. No one can predict with any degree of certainty how the exchange rate will evolve over that time, so hedge your bets.
Invest the balance in dividend paying stocks of sound companies. Focus on those with a history of regular dividend increases. Canadian examples would be Fortis Inc., Canadian Utilities Ltd., Emera Inc., BCE Inc., North West Company Inc., and the major banks. U.S. holding could include AT&T Inc., Verizon Communications Inc., and Duke Energy Corp.. Maintain the 50-50 split here as well.
Your RRIF will generate more income and the cash position will protect you from having to sell if you need to withdraw money when the market is down.
--Gordon Pape
What’s up in the days ahead
Canadian corporate profits will show a big improvement as the third quarter reporting season picks up momentum over the next couple of weeks, according to observers. But will the results be enough to justify the stock market’s brisk V-shaped recovery since March and sooth investors rattled by soaring COVID-19 infections? David Berman will report.
Click here to see the Globe Investor earnings and economic news calendar.
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Compiled by Globe Investor Staff