HUV-T: Given current market conditions, a regime change is clearly in effect, which drives four investment considerations moving forward.
First, the markets have entered a bumpy road that will continue until a systemic problem presents, i.e. the failure of a major bank, pension fund or hedge fund. The U.S. Federal Reserve, which largely sets global interest rate policy, continues to press interest rates higher thereby increasing the threat of substantial economic carnage. The speed of the interest rate increases is causing significant economic pain in both the U.S. and abroad. Investors now have three interrelated choices:
1) Raise a cash cushion (if not yet done) and wait for market bottoming.
2) Identify companies to sell.
3) Prepare a buy list.
Second, while a somewhat deeper correction is expected I do not anticipate a catastrophic market melt. Once rising unemployment commences, the U.S. economy will suffer significant demand destruction. Additionally, the high U.S. dollar creates meaningful earnings headwinds for U.S. multinationals. Similarly, the strong Canadian dollar vis-à-vis our non-U.S. trading partners is a meaningful headwind. A high Canadian currency is typically associated with a deep recession shortly thereafter.
Third, ETFs and other passive investment products have been toxic in 2022. Reflecting on market leadership trends from past cycles, active management should now assume market leadership. In the immediate aftermath of the 2008 global financial crisis, active management led while passive indexed and ETF products were subject to significant sector rotations and middling returns. Should that prior pattern repeat, only after volatility falls and market order has re-established, the low-hanging fruit has been harvested and the heavy lifting is complete will passive investment strategies again assume a more prominent role.
Fourth, investors should bear the fruits of major corrections in mind. Buying quality names at deep discounts during a recession and holding through the subsequent economic recovery and the mean revision valuation reset is a silver lining as it drives out-sized returns. For context, buying quality European names during the 2008 PIIGS-induced crisis and holding for three-to-five years was upon closer reflection akin to shooting fish in a barrel.
Darren Sissons on BNN.ca Market Call thirsty Thursday Sept 29th @ 1200ET |
