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Rosenberg, Belski, Shannon and two other top market strategists reveal their most important advice for the second half of 2018

The Globe and Mail asked these experts for their most important piece of investment advice for the second half of this year …

David Rosenberg, chief economist and strategist for Gluskin Sheff + Associates:

The S&P 500 peaked on Jan. 26, and the longer we go without making a new high, the clearer it becomes that the cyclical bull market is over. The fact that volatility so far this year is 50 per cent higher than last year, on average, is consistent with a shift in leadership to value over growth, active over passive and defensive over cyclical investment themes.

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Yield curves are flattening, global central bank balance sheet growth is slowing sharply, and the U.S. fiscal stimulus will soon begin to fade. All the while, a North American economy heading into the 10th year of expansion at full employment strongly suggests that late-cycle investment strategies will win the day. This means protecting against cost-push inflation [increases in the price of labour, raw materials, etc.], bracing for higher short-term rates, and stepping up the quality of the portfolio. In other words, a pervasive focus on earnings visibility in the equity market and balance sheet strength (and minimal refinancing risk) in the credit market.

I should add that cash is no longer trash, with the 2.5-per-cent yield for short-term government bonds comparing rather favourably with the S&P 500 dividend yield of 1.9 per cent. Investors now get paid to have cash or equivalents on hand, which will come in handy as liquidity will likely emerge as a very big issue – and a constraint on the market in the second half of the year.

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Eric Lascelles, chief economist for RBC Global Asset Management:

While it is tempting to continue squeezing every last drop out of a remarkably long-lived bull market, the economic climate is clearly changing. After an extended stretch of low volatility and unusually sunny markets, several pendulous clouds now hang overhead. Interest rates and inflation are both now billowing higher, providing less support for growth and stock valuations. The U.S. tax cut tailwind is still powerful, but it is increasingly priced into the market and now challenged by mounting protectionist headwinds. Similarly, the business cycle continues to march forward, making an increasingly persuasive argument that the hour is growing late. As a result, stock market gains have been much less reliable in 2018.

To be fair, nothing points to imminent disaster, most economic metrics are still pretty good, and it is rarely advisable to make drastic changes to one’s investment portfolio. But the prospective reward for being bold has arguably shrunk at the same time that the risk of a bad outcome has increased. Best, then, for investors to gradually reduce the extent of their equity and high-yield overweight positions over the second half of 2018, swapping them for safer asset classes such as higher-rated bonds.

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Brian Belski, chief investment strategist at BMO Nesbitt Burns:

Faith in fundamental investing is being tested heading into the second half of 2018, as rhetoric continues to rule the roost.

We continue to believe the majority of investors are missing several fundamental facts that support higher equity prices due to an overwhelming supply of rhetoric, innuendo and affinity for negativity. For instance, the propensity of imminent recession forecasts, earnings and index price peak prognostications, let alone downright stock market implosion predictions from clients and market pundits alike are reaching a feverish pitch once again in our view. Granted, the investing landscape has admittedly turned more volatile the past six months. However we continue to believe most investors are so entrenched in consensus negativity and bullet-point conclusions that they are missing broader facts, analysis and concepts that tell a much more compelling and clear story. As such, we continue to advise clients to embrace facts and analysis – facts that clearly support the notion of, “As America goes, so goes Canada.” Stop basing your investments on possibilities and emotions, and start believing in how great Canadian and American companies are – period.

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Stephen Takacsy, CEO, chief investment officer of Lester Asset Management:

Don’t be complacent and make sure portfolios have defensive characteristics. Both stocks and bonds are expensive, and financial risks are elevated due to rising interest rates, high government and consumer debt levels, rogue U.S. politics, and the threat of global trade wars. A defensive portfolio means having some cash to take advantage of better prices when opportunities arise and reducing exposure to overly popular ETFs and sectors trading at high multiples like technology, and speculative manias such as cannabis stocks and cryptocurrencies. It is also important to review portfolios and identify investments that may be at risk from U.S. tariffs. However, there is still good value in small and mid-cap stocks that are growing within Canada or have operations in the U.S. These stocks have increasingly been neglected by investors who have followed the herd into overpriced big-cap index ETFs. Also, the recent correction in high dividend-yielding stocks in the utility and telecom sectors has presented a good long-term buying opportunity. For fixed-income securities, the better returns are in corporate bonds, however maturities should be laddered over a maximum of seven years.

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Kim Shannon, president and co-chief investment officer of Sionna Investment Managers:

Most investors have an instinctual aversion to risk of loss, and if they perceive a hazard in the market they are inclined to want to sell into a market concern. And that is why studies by market research firm Dalbar demonstrate that most investors get poorer returns than the funds they invest in.

My favourite advice for investors – for any future period of time – comes from a 500-year-old recommendation by Jacob Fugger the Rich. The German financier suggested that you divide your fortune into a rational asset mix of income-growing stocks, income-producing bonds, cash and real estate (today one can add more variety than was available back then). The true magic of this diversification is to maintain some balance between the chosen assets in such a way as one trims and takes profits in sectors that have become too large in your portfolio due to appreciation, and reinvests those funds into those assets that have fallen to a smaller portion of your portfolio. This rebalancing technique is proven to be additive to long term returns and doesn’t require an investor to accurately forecast where assets are going in the next six months. Accurately guessing what markets are likely to do in the next six months is impossible for any investor to consistently do well. Warren Buffett and Jacob Fugger the Rich both avoided forecasting as they both knew it was ineffectual in the long run. Don’t forecast, rebalance.

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