CIO says markets are awash with warning signs, sentiment is teetering and tells investors to position portfolio accordingly
Game Five may have dampened the mood at the 56 Jurassic Parks around the country Monday night but investors have still been urged to follow the Raptors playbook and get their defence in order.
A standout play of the see-saw series has seen Toronto – led by the the unshakeable Kawhi Leonard – excel when defending the paint from Golden State Warriors.
For investors, current volatility and uncertainty in the markets mirror the unpredictability of this epic NBA battle and Greg Taylor, CIO at Purpose Investments, said that in a portfolio, like the Raptors, defence is just as important as offence.
He said: “As we head towards the halfway mark of 2019, it’s safe to say that volatility has been heightened so far this year, as we’ve warned it would be. Couple that with the fact that we’re in the later stages of the economic and likely market cycles, positioning portfolios defensively just makes sense.”
Taylor added that the risk of a trade war ultimately causing a global recession finally caught up to markets in May after investors had come to believe that the threats would recede and a deal would be agreed between US and China. Hopes of a quick truce have since faded, while US President Donald Trump subsequently ramped up the pressure with new tariffs on both China and Mexico.
A deal with the latter was reportedly agreed over the weekend but Taylor said markets are now beginning to price in a slowdown, highlighting the bond market as the best illustration of this.
He said: “It wasn’t long ago that investors had positioned for rates to move higher as central banks were openly talking about the removal of stimulus programs. Recent events have reversed that narrative and markets are expecting two interest rate cuts from the Federal Reserve.
“The US 10-year Treasury began the year with a 2.68% yield and ended May at 2.12%. In many parts of the world, interest rates are back to negative, while the US yield curve is now inverted at many points of the curve. These aren’t signs of a healthy market – they are warning signals of a coming recession.”
Taylor said bulls will make the case that these problems can be fixed “in one tweet” with an end to the hostile trade actions of the US giving investors the confidence to come back to the markets. However, he believes the longer this combative environment persists, the more the real risk of a global recession becomes. He added: “Markets hate uncertainty and corporations are no different.”
While it may turn out to be a self-inflicted recession, that doesn’t mean it will be easy to fix. Companies are starting to warn that their earnings will be affected and could delay planned capital expenditure and hiring.
Taylor said: “With so much uncertainty in the markets, many are relying on technical analysis as much as fundamentals. The latest bout of volatility is leading many to make the prediction that equity markets could be headed back to the lows seen in December, which is roughly another 15% lower for the S&P 500. In a very short period of time, markets have turned from all-time highs to levels below moving averages and levels of support.”
So if it’s time for a Leonard-style block at the rim, where should investors turn? Taylor admitted there have been few hiding places in the last month.
He said: “Gold and gold equities are finally beginning to act like the insurance policies they are supposed to be, but they’ll require a breakdown in the US dollar before we can call the all-clear for this sector.
“One of the more surprising pockets of strength has been the cryptocurrencies. Bitcoin is now up 100% on the year after being written off as dead not long ago. Whether or not the cryptos can be considered a true safe-haven play is still up for debate. It remains a highly speculative asset.”