It’s not difficult to find an investment strategist counselling a defensive approach that can provide protection against the kind of convulsions seen in financial markets lately.
On Tuesday, equity markets once again lost their composure as any positive sentiment resulting from an easing of global trade tensions vanished, reinstigating a global sell-off that started in early October.
The vacillation between fear and confidence with little warning is itself a sign that the bull market is in its later stages, said Ian de Verteuil, head of portfolio strategy for CIBC World Markets.
“This is typical late-cycle behavior and makes a structured equity investing approach more difficult,” Mr. de Verteuil said. “We continue to believe investors should take a defensive investment posture into year end, and through 2019.”
But playing defense can be challenging in a market steeped in resources such as Canada’s, which has a pro-cyclical bent.
The pockets of the stock market where investors have historically found refuge have been in sectors with some built-in resilience to economic recession, such as consumer staples, utilities, and telecoms.
Since the U.S. stock market bottomed out in 2009, these sectors have been trounced by their growth counterparts – including technology, consumer discretionary and industrials – by around 40 per cent.
In October, as the market boom led by big-name tech stocks began to waver, the stock market’s script flipped, and defensive sectors took over as market leaders.
That trend has been less stark in Canada, where the commodity sell-off and the domestic pipeline quagmire have steered the market this year, and where resources plus financials still equal about 62 per cent of the total stock market.
So where to seek shelter in Canada? A sampling of strategist recommendations points to Canadian banks and telecoms. And for the anxious investor, there is always the ultimate defensive position: cash.
Canada’s banks have developed a strong track record of proving resilient to stressors – everything from the global financial crisis to the downturn in Canadian housing prices.
“Canadian banks as a rule are defensive,” Mr. de Verteuil said. “I wouldn't say that about banks in general but I will say that about Canadian banks.”
For the past seven consecutive calendar years, financials have outperformed the S&P/TSX Composite Index. Still, with a forward price-to-earnings ratio of about 10 times, and a dividend yield of around 4 per cent, Canadian financials are hardly looking stretched on valuation.
“The longer-term operating performance of the sector is running on all cylinders, while dividend growth remains robust,” Brian Belski, chief investment strategist at BMO Nesbitt Burns, said in a recent report.
Canada’s big telecom companies have the combination of higher yields typical of defensive sectors, as well as some economic resilience built in to the business model.
“There are millennials who would give up their cars before their cellphones,” said John Zechner, president of Toronto-based wealth management company J. Zechner Associates. “If I’m going to hide somewhere in Canada, it’d be more in that group.”
Mr. Belski adds that telecom valuation and growth trends appear to be “stable and bottoming,” which can provide some “consistency to Canadian-centric portfolios.”
Cash investments such as savings accounts and money market funds are often thought of as dead money rather than a legitimate asset class. But it’s also one of the best performing asset classes so far this year, which has seen a huge proportion of global asset classes post negative returns.
“Cash returns are getting a little bit higher, so it’s not like you’re getting nothing to sit on cash,” Mr. Zechner said.