Where are the investment opportunities in the 'new normal'?

The bear market rally is on – but where are the opportunities going to be in the “new normal” and how should investors approach this uncertain period?

Barry McInerney, CEO and president of Mackenzie Investments, can lean on a wealth of experience in Canada and the U.S. to plot his company’s course as markets emerge from the bottom, albeit shakily.

He told WP that FAANG stocks, and other tech and e-commerce firms, look well positioned to capitalize on new trends and behaviours. He also believes this is a time for active management to shine – both in public equities and fixed income – and urged advisors to examine their asset allocation, particularly with a view to diversification via liquid alternatives and sectors in the Chinese market.

To grasp these fully, however, he said it was important to understand why we are in a bear market rally and what measures have been taken to deal with the unprecedented economic shutdown. The pandemic prompted the S&P 500 to plummet more than 30% in just 20 days. In short, a rapid descent.

Markets hated the uncertainty but, learning the lessons from 2008-09, central banks and government were swift to unleash their recovery playbook.

McInerney said: “That provided - I wouldn't say confidence - but less and less uncertainty that governments are going to do what's required to provide some underlying footing while the healthcare systems react to the pandemic and we start to try to contain this and flatten and bend the curve.”

Developed nations essentially reduced interest rates to zero, which the CEO said speaks to the relative return game of where to put your money when 25% of government bonds in developed nations globally are yielding negative yields. Then, from the U.S. perspective, the S&P has been powered by large tech stocks, with the FAANG gang performing relatively well in 2020.

“We’ll probably have a couple of quarters, particularly Q2, of significant GDP contraction,” he said. “But there are reasons [to believe] that a fair market rally is occurring, although we should put it into perspective.”

McInerney warned against complacency and predicted ongoing volatility with the U.S. election ahead and the potential for a second pandemic wave. However, he told WP the probability of returning to the bottom appears less likely given the principal reason it plunged so low was the initial uncertainty.

This is now an environment where active management can add a lot of value through experienced portfolio managers and advisors who know how to reposition portfolios to take advantage of new secular trends. As well as technology and e-commerce, McInerney said certain asset classes are worth exploring.

“Liquid alternatives are becoming more prevalent in Canada. These are accessible to the individual investor now and provide return patterns that have low correlations to traditional stocks and bonds.

“They have a good role in a portfolio to help diversify and smooth out your retirement journey. I was running a financial company in the U.S. during the last financial crisis and liquid alts, post-2008-09, really started to grow in popularity. Once the dust settled, the largest traditional investors and ultra-high-net-worth investors were not harmed as much because they had exposure to direct alternatives.”

On the equity side, the CEO said many forget about China being the second-largest stock market and economy in the world.

He said: “More and more, China is being viewed as a separate asset class because it is a great risk diversifier. You can always debate return opportunities but just from a risk diversification perspective, it has sectors in the equity markets that complement well versus Canada.”

One of the biggest mental hurdles for advisors and investors to get over has been the discrepancy between Wall Street and Main Street. The common man requires a broad-based recovery of not just mega tech stocks but also of small and mid-sized businesses, and advisors must ensure clients are as broadly diversified as possible.

“There are a lot more strategies and tools at an advisor’s disposal today than 10-20 years ago in terms of diversification. Most, smartly, will have taken a step back a couple of months ago to make sure their asset allocations and time horizons were still appropriate, and that their clients’ objectives were the same. Be long-term focused and very diversified. That's really the best advice.”

He added: “We did have bear market rallies last time in 08-09 – we had big declines, sometimes a recovery, then declines again. There is the feeling this time around that if we're successful with the stimulus that’s been put in place and our ability to flatten and bend the curve, then there is an ability here for the economy to, not bounce back, but to come back.

“The contraction might be just a couple quarters and I think the V recovery is unlikely right now. This could be something we can power through over five or six quarters after the initial contraction.”