Investors aren’t without their concerns right now. Attempting to unearth decent returns and mitigate volatility is tough and there is a distinct lack of confidence in the markets. With this in mind, we sat down with Andy Nasr, VP, Capital Markets and Investment Strategist at Sentry Investments, to speak about the worries of the modern investor and some strategies that can be used to overcome current challenges.
“There’s a lot of concern around valuations at the moment: investors are worried that the markets are frothy and that’s not just with equities but with some fixed income markets too,” Nasr says. “A lot of investment grade sovereign debt is trading with negative yields, so valuations across the board make it a more challenging environment for investors to make money.”
The global political situation hasn’t helped investors this year. Brexit, the impending US election and the upcoming Italian constitutional referendum are all adding to investor uncertainty. In addition, France and Germany will hold their national elections in 2017. “Political uncertainty is generally not good for the markets,” Nasr says. “Looking at the US election, you’ve got two candidates who could both negatively impact policy with respect trade, healthcare and other sectors. Those are the overarching concerns I’ve heard in recent conversations with investors.”
Nasr tackles the current hurdles by adopting a bottom-up approach and spends a lot of his time looking for individual companies that are generating high levels of free cash flow.
“These companies typically have high barriers to entry and good economic moats, which means we’re confident they’re good, longer-term oriented businesses,” Nasr says. “Our geographic allocation and asset allocations are shaped by the opportunities that our individual portfolio managers see within their respective areas of expertise. One of the best ways to mitigate the risks of volatility is through diversification and securities selection, and that’s where we're focused.”
Nasr has seen investor bias be affected by market volatility and expected returns, and, as a result, investors are looking for yield with names they perceive to be less economically sensitive. “2016 has seen a wide divergence with respect sector returns,” Nasr says. “Looking at the S&P 500, for example, one of the best performing sectors is utilities, which has historically been very defensive. Consumer staples and telecoms have outperformed the broader index and more cyclical sectors have not done so well.”
“Investors have pushed into defensive sectors, which have, in our view, become relatively expensive. We just can’t justify the valuation in sectors like utilities.”
Going forward, Nasr thinks that advisors are going to have to deal with a heightened level of volatility. To mitigate the volatility risks, he believes it’s important to have a well-diversified portfolio with exposure to different asset classes and some different geography. “The US and Canada have very good risk adjusted returns compared to other parts of the world, but it’s good to have that diversification,” Nasr says. “If our markets did have a sell-off and a correction, you want to be well-positioned to reallocate capital to other sectors or regions that become attractive. Putting all your eggs in one basket, whether it’s a sector specific ETF or regional ETF, could prove to be hard to contend with.”
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