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The belief that a day of reckoning for financial markets is at hand is very strong. But investors often become hostage to a dominant narrative that later turns out to be dead wrong. Last time, I addressed the question of whether the global economy can handle higher interest rates and whether inflation will accelerate or decelrate from here. The data do not necessarily support a such a strong consensus for an oncoming market apocalypse. So to mitigate the risk of making bad investment decisions, investors should stay alert for new narratives that can rapidly change market direction. Here are three more key questions we answered at our recent webinar.
Whether readers agree with climate change or not, it is clear that fossil fuels will be steadily replaced by renewable electricity as the globe’s dominant energy. Global governments are nearly unanimous here. This transformation will be enormously capital intensive (with estimates ranging from $100 trillion to $150 trillion over the next three decades) and could be comparable to the post-WWII reconstruction boom, as infrastructure, transportation networks, and technologies require vast amounts of fixed capital investment. Russia’s aggression against Ukraine only reinforces this trend.
Yet the global carbon transition is not a one-way bet. After years of underinvestment by fossil fuel producers and the stunning collapse of energy prices in early 2020, no one should be surprised that traditional energy prices have rebounded. Big economic downturns have always caused supply-side withdrawals, setting the stage for price increases in the subsequent recoveries.
But the transition to a lower carbon economy was always destined to be clunky. Renewable energy will take decades to build up. What’s more, traditional energy companies themselves are strategically buying renewable assets. They, too, will be diversifying their asset mix from fossil fuels into renewables. The path to a green future will be far messier than most think.
The key in the coming period will be to orientate portfolios away from assets dependent on low interest rates to assets with strong pricing power (and those that will even benefit from higher interest rates). That means avoiding investment classes that needed cheap funding and secular stagnation to thrive and emphasizing ones that have languished for much of the last decade.
Our investment positioning is summarized as follows:
Avoid or minimize: U.S. growth stocks, which will face years of headwinds due to higher funding costs; the technology sector (as we have recently said, “fantasy investing is out and fundamentals are in”); and even residential real estate. Investors should not succumb to the recession panic: Keep bond duration short. Broad-based index strategies are also vulnerable as they are all now heavily concentrated in the winners of the last decade.
Include: International value stocks, which trade on far lower multiples and far higher dividend yields and will benefit from a competitiveness boost due to recent currency depreciation; select emerging market equities (the cyclically adjusted price/earnings ratio for emerging market equities is 12.5 times, compared with 30 times for the U.S.); Chinese stocks (which reliably outperform during periods of domestic policy easing); and sectors with pricing power (banks, industrials, healthcare). Despite recent declines, commodities remain in a secular uptrend. Industrial-metals-oriented equities will remain well-bid as decarbonization is highly base metal intensive (Chile, Brazil, and Peru all stand to benefit and provide an excellent inflation hedge). High income can be found in floating rate loans and emerging market bonds (many EM central banks were much more pre-emptive in hiking rates than Western central banks, with our favoured ETF holding now yielding over 8%).
The good news for investors is that these preferred investment classes no longer come with demanding valuations. Also, the normalization of interest rates is wonderful news for income investors who can once again secure reasonable yields: Our flagship “Global Balanced” strategy now sports a portfolio yield of 4%…a figure we have not seen for years!
We have watched the crypto bubble unfold, with many ditching diversification, fundamentals, and all common sense in pursuit of short-term profits. Now, extremely speculative positions are facing extremely large losses. This is called gambling. We now prefer to use a definition coined by Billy Corben, director of a documentary of the drug trade in 1970s Miami: “Crypto is the new cocaine.” Just say no kids.
Tyler Mordy, CFA, is CEO and CIO of Forstrong Global Asset Management Inc., engaged in top-down strategy, investment policy, and securities selection. The Forstrong Global Investment team contributed to this article. This article first appeared in Forstrong’s “2022 Super Trends: World in Transition” publication available on Forstrong’s Global Thinking blog. Used with permission. You can reach Tyler by phone at Forstrong Global, toll-free 1-888-419-6715, or by email at tmordy@forstrong.com. Follow Tyler on Twitter at @TylerMordy and @ForstrongGlobal.
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Content © 2022 by Forstrong Global. All rights reserved. Reproduction in whole or in part by any means without prior written permission is prohibited. Used with permission.
The foregoing is for general information purposes only and is the opinion of the writer. The author and clients of Forstrong Global Asset Management may have positions in securities mentioned. Performance statistics are calculated from documented actual investment strategies as set by Forstrong’s Investment Committee and applied to its portfolios mandates, and are intended to provide an approximation of composite results for separately managed accounts. Actual performance of individual separate accounts may vary with average gross “composite” performance statistics presented here due to client-specific portfolio differences with respect to size, inflow/outflow history, and inception dates, as well as intra-day market volatilities versus daily closing prices. Performance numbers are net of total ETF expense ratios and custody fees, but before withholding taxes, transaction costs and other investment management and advisor fees. Commissions and management fees may be associated with exchange-traded funds. Please read the prospectus before investing. Securities mentioned carry risk of loss, and no guarantee of performance is made or implied. This information is not intended to provide specific personalized advice including, without limitation, investment, financial, legal, accounting or tax advice.
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