Head of leading macro research firm isn’t betting on a global recession, sees equity winners amidst sell-off
Global investor anxiety might prove misplaced provided policymakers make the right moves soon, claims one leading investment analyst.
Phillip Colmar, global macro strategist and managing partner at research firm MRB Partners, told WP that though a global recession driven by the coronavirus outbreak is “a non-trivial risk,” it’s not in the firm’s base case. He thinks that allegories to the 2008 financial crisis are largely misplaced. Colmar shared the equities he thinks will win out in this market, as well as the moves policymakers can make to re-start equity growth.
“I know the bond markets coming off that kind of fear are priced for a deep recession, a deflationary shock,” Colmar told WP. “But I just can't come up with the numbers that make that make sense.”
Colmar thinks allegories to 2008 are largely unhelpful. During the great financial crisis the selloff was compounded by systemic risk throughout the financial system whereas today the selloff is not driven by a crisis in the financial system. Where he does see a similarity is in a confidence crisis. Now, as in 2008, investors are looking to policymakers for protection. If policymakers can provide a fiscal backup beyond just a rate cut, that could serve to “ring fence” the crisis and compound the effects of past and future rate cuts. In such a situation, Colmar sees a big resurgence in equities on the horizon.
“We’re going to see some bounces, we’ve seen them through the past couple weeks,” Colmar said, “but we're still constructive on the economy and six to 12 months out on equity markets from current levels.
“If earnings are strong enough and we’re not heading for a recession, I think you’re going to see some bigger investors come back into the market.”
Even in lieu of big moves by policymakers, Colmar thinks investors can win in a few sectors. The first is U.S. financials. Though investors might be nervous to invest in the sector that drove the last great crisis, Colmar thinks that U.S. financials are far more fundamentally sound than they were in 2008. U.S. household durables, including homebuilders, are a winner as well. He thinks that low bond yields are driving a shift back in the U.S. from renting to home ownership. Noting that the healthcare sector will need heavy investment to get through this crisis, Colmar has taken a ‘barbell’ position on U.S. and global healthcare equities.
He’s avoiding “mid to late cyclicals”. That includes energy companies, now doubly hurting after this week’s oil price “washout”. Material companies, industrials, and infrastructure all look dismal this year. Colmar explained that 2020 wasn’t likely to be a big year of infrastructure spending to begin with and now with this downturn looming over the sector it’s hard to see businesses that weren’t likely to gear up capital spending kick themselves into gear.
Canada might be more exposed to this crisis than the U.S. or the global average. Canada is one of MRB’s “canary” economies, along with Australia and New Zealand, that have highly leveraged economies and housing excesses. Canadian exposure to energy, as a whole, might prove problematic as well.
Nevertheless, Colmar thinks that investors need to steady themselves and settle their anxieties and prepare for some up and down on the market.
“At the end of last year investors got tired up in their euphoria, they also have to be very careful not to get wrapped up in their pessimism now. There are opportunities out there and I think we are discovering a few more right now as the market corrects.”