Finding a needle of opportunity in an investment haystack

Finding a needle of opportunity in an investment haystack

Finding a needle of opportunity in an investment haystack For those on the more positive end of the spectrum, reports this week concerning Canada’s economy were pretty disheartening. A rebound in the price of oil and the loonie since January’s lows meant many, the BoC included, believed the economy was headed in an upward trajectory. Statistics Canada’s Q1 release revealing the economy had actually contracted in March put paid to that, not to mention the fire in Fort McMurray and the IMF’s dire warning on personal debt.

Youssef Zohny, as director of Wealth Management with StennerZohny Investment Partners+, needs to keep ahead of such development and ensure his clients don’t get caught short when the markets take a turn for the worse. He spoke to Wealth Professional concerning a very up-and-down first quarter in 2016.
 
“The business trends themselves have not been great, but what has boosted some of the results is more financial engineering,” he says. “We are seeing buybacks so that’s reducing the share count, as well as some cutting in expenses.”
 
This strategy means that many of the companies listed on the main exchanges in the US and Canada are not exactly optimum value, as the portfolio manager with Richardson GMP’s subsidiary explains. 
 
 “Fundamentally speaking, our view is that earnings are weaker than expected, but we are at a time in the market cycle where valuations are at the top of their historic range,” he said. “It’s a dangerous combination of high valuations and weakening earnings which could lead to a correction.”
 
In his team’s recent newsletter, the e-wealth report, the disconnect between the major US indices and most of the rest of the world was highlighted. This, Zohny says, led to unreasonable optimism regarding the markets by many people.
 
 “Certainly a lot of attention is paid to the Dow Jones and the S&P 500, which have been some of the best performing markets in the last few years,” he says. “If you start to look outside US – the TSX, emerging markets, Europe, developed Asia, most of those markets are trading well below their highs.”
 
Another factor that is looming over the European markets is the possibility of Brexit. Currently, that race looks to be a dead heat, meaning the smart money cannot be deciphered either way.
 
“The polls are indicating it’s a toss-up,” says Zohny, “should the UK decide to leave the consequences probably won’t be reflected immediately in the markets, aside from the currency. We are currently underweight in Europe. Our view is that the valuations and the fundamentals mean the risk/reward is not attractive for Europe currently.”
 
One area where investors have been able to find some returns in 2016 is with resources, although the StennerZohny head reveals these yields are temperamental and don’t stay in overly positive territory for two long.
 
“The resource and precious metals markets have been some of the best performing markets in 2016,” he says.  “We made some investments there at the end of 2015 and really what has happened there is a strong reflation trade. That area is becoming a little bit rich now so momentum has slowed.”