Investors have false sense of optimism, says PM

AGF Investments portfolio manager analyses US earnings, the 2019 outlook and where the opportunities are for investors

Investors have false sense of optimism, says PM

With “spectacular” 2018 earnings growth in the US and an encouraging recovery from the recent 20% market drop, investors are getting a false sense of optimism, according to a portfolio manager.

Mike Archibald, associate portfolio manager at AGF Investments Inc, said that despite a “tremendous” amount of recent volatility, everything currently feels good and 2019 has resulted in a positive stock market performance.

But he said: “There is certainly a little bit of complacency at the current time so that’s why I’m a little bit cautious near term. My broader sense is we are probably going to have a choppy sideways market for the next couple of months as we work through some of the macro issues that are out there.”

However, Archibald, who does not foresee a recession until late 2020 or early 2021, said that assuming US and China come to some sort of trade resolution, he expects the S&P 500 to end the year somewhere in double-digit territory.

It’s a return to normality and significantly lower earnings than investors enjoyed last year when nine out of 11 sectors had double-digit growth with only consumer staples and REITS dipping marginally below that mark as the S&P was up 22% year-on-year.

Archibald believes some of that should roll through to 2019 with select sectors but concedes 2019 is not going to be nearly as robust as what we all saw in 2018. For investors, he said the cyclical part of the market is the place to look for opportunities right now, especially industrials, materials and energy.

He said: “Those groups have relatively good forecasted earnings in a slower earnings environment. They trade with earnings multiples that are less than the broader S&P 500 and they have the most leverage to be a potential for declining US dollars to the extent that rates aren’t going to go up as fast as expected and the dollar should start to weaken relative to other currencies. That is going to be a major tailwind for the commodities space.”

He added, therefore, that copper, gold, energy and foreign industrial companies are ones to like as they have a good correlation to the greenback.

He added: “We like those sectors – we think they’ve been underperformers in the five-year cycle in the US and Canadian market, so if you can get any whiff that the US is going to be weak for a 6-10 month period, which we do, then I think there is a good chance those sectors are going to re-rate higher and you are going to get a really good bang for your buck in some of the higher beta parts of the market.”

So how does this relate to portfolio strategy? Archibald believes that, while a balanced portfolio remains vital, he would suggest in the very near term a higher allocation to cash because of the tremours still being felt by the 20% move down and 20% move back up. Taking a bit of risk off the table, he said, makes sense.

He added that searching out high-quality companies that offer a good earnings stream as well as potential for dividend is a good move because going too defensive is too costly.

He said: “The defensive sectors – the telecom, the staples – those are expensive areas of the markets. The utilities offer less growth. Having a name or two in the portfolios that give you good dividend growth makes sense but re-weighting a bit more towards the cyclical sectors makes the most sense here.”