CEO assesses the stars and duds of 2019 and what advisors should be mindful of next year
Unlike 2018 when the investment world was obsessed with what was happening in the cannabis sector, 2019 provided a more diverse set of sector news. Cannabis remained a story but more so for the fluctuation of stock prices as companies adapted to legalization. Technology remained top of mind as the major players kept pilling up cash, resulting in dividends and buybacks. Cryptocurrencies also continued their inconsistency and other sectors like healthcare and energy took hits.
“It has been an interesting year for sectors,” said Michael Kovacs, President and CEO, Harvest Portfolios. “The top three were tech, REITs and utilities. For REITS and utilities, it was caused by interest rate sensitivity with many investors moving to more secure, or at least perceived more secure, sectors. Technology was a star in 2019 with good quality companies generating dividends. We never thought years ago that they would turn into the dividend payers that they have.”
Kovacs noted that it is not uncommon to see sectors move around, that is why his company takes a long-term approach by owning solid companies. He noted, that the philosophy has paid off as Harvest continued to see flows into their funds holding those quality companies.
Yet for Kovacs, what turned out to be more interesting were the sectors that struggled in 2019. “Healthcare and Energy got hit hard while Materials were beaten up. People turned away from energy as a less desirable sector to own in portfolios. For healthcare, we still think it is a fantastic sector and a global phenomenon but there has been so much rhetoric surrounding the US election, it may take a year or so until it gets back on track.”
Oil was an interesting sector in 2019. There was the announcement of the continuation of OPEC cuts which are set to continue into 2020. In September, there were attacks on a Saudi Arabian oil facility and oil fields, which affected the global supply. Yet even with that, Kovacs still sees potential for energy, at least short term. “Long term I think oil production will top out. Saudi Arabia and other oil producers are looking to max their oil price and production while they can. The attacks were a sign of the geopolitical climate but there wasn’t a sustained jump in prices that resulted from it, which shows the amount of supply. Even in Canada, our biggest customer for oil, the US, has gone from a net importer to net exporter. So, we see the prices remaining around $50-$60 a barrel for the near future.”
Another area Kovacs sees staying around is the Cannabis sector, despite its ups and downs during the year. Canopy Growth, for instance, saw its stock rise to almost $70 in May, before plunging to the high $20s/low $30s in the fall. While his funds don’t directly hold cannabis companies, he has been keeping his eye on the sector. “It is definitely a developing area, but it is still in its early days. There are legislation and political risks in the US, but it is not going to go away and should continue to grow. I think it may have just gotten a little ahead of itself based on legal changes in Canada.”
One sector that saw even more fluctuation was cryptocurrency, illustrated by Bitcoin, whose value saw a low of just over $3,300 in February, skyrocket to nearly $13,000 in June before dropping to the $8,000 range in the fall. Harvest does have a blockchain fund and Kovacs notes that they see the fluctuation because the two tend to get lumped together. “Blockchain, as a digital technology will continue to grow which we have seen within the companies of our fund. Crypto uses the blockchain technology so the two are coupled. I think there were too many cryptocurrencies too quickly and eventually we will end with a few, Bitcoin and maybe Ethereum being two of those, and there will be additional regulation and standardization. I do see a future for it, much like any new technology, it takes time to work out the kinks.”
Based on where the economic cycle is, Kovacs believes that quality companies and an old staple will see interest in the near future. “One sector that also did well in 2019 is gold, up 17-18% for the year. The fact that we are in the later stages of the economic cycle and gold is up is something that should continue next year. With a US election next year, I think investors will continue to be cautious. Many investors are waiting on the sidelines, being conservative and holding more cash until they see what happens.”