Investors warned about chasing already realized returns

CEO believes barbell approach is prudent as we likely move into a less accommodative market environment

Investors warned about chasing already realized returns

After a year of “abnormal activity” in the markets, a barbell approach that doesn’t overly discriminate between investment themes - and maintains broad diversification - can help investors navigate this return to economic normality.

That’s the view of AGF CEO and CIO Kevin McCreadie, who believes it’s still prudent to be overweight cyclical areas of the market but warned this trade has already run hot and that investors need to be careful about chasing returns that have already been realized. Instead, he added, try to earn what comes next through analysis of fundamentals of individual companies.

From a broader asset allocation standpoint, fixed income remains a dilemma, in particular government bonds that are susceptible to rising interest rates. McCreadie beleives the answer, at least in part, is to be diversified across a wider spectrum of fixed income assets, including those that are less rate sensitive such as high-yield credit.

“In addition, alternative asset classes and strategies – from private credit to equity hedges – are only becoming more important in the grand scheme of things as a potential means to higher income and lower volatility. Of course, knowing the right mix will largely depend on individual circumstances and objectives, but not exploring these options could leave investors short of their goal whatever that may be.”

Looking at the major equity indexes, the past month or so has been notable for a couple of minor pullbacks and then small surges that have added up to almost nothing in terms of gains or losses. After rising a little more than 5% in April, according to Bloomberg, the tremendous rally in U.S. stocks since markets bottomed over a year ago seems to have stalled for now, according to McCreadie.

However, the CEO said there’s been more volatility to contend with than broad-based equity benchmarks suggest, citing the fall of Bitcoin, SPACs, and some of the frothier tech stocks as a signal of the threat of inflation. On the flipside, of course, some of the more cyclical parts of the market continue to run up as the recovery takes further hold. 

McCreadie suggests this reveals how caution is starting to take precedent over exuberance but insisted equity markets can still climb and that it’s actually encouraging to see less froth in the market – even if the short-term pain can be tough to swallow.

He explained: “This reflects that a more reasoned approach to markets is coming to the fore while the more speculative nature of markets that has been evident in recent months is starting to wane.

“Remember, markets have rallied off the bottom in large part because of tremendously stimulative monetary and fiscal policy that has almost acted like a free pass for investors to take on excessive risk whatever their poison. But investors can no longer count on ‘more of the same’ from governments and central banks now that the economy is beginning to normalize from an abnormal state of being.”

He added that the possible reduction in scale of President Biden’s new infrastructure bill, and the ramifications of the Fed’s next move related to inflation and QE tapering, means we’re now entering a much less accommodative environment at a time when it’s still very difficult to forecast what the new normal for the economy is going to be.

McCreadie said: “It may be months before we figure that out and it’s because of that uncertainty that more emphasis will likely need to be placed on those basic principles of investing that have been somewhat forgotten of late in favour of heightened speculation.”