Three things that could accentuate growth slowdown

Investors should watch out for a “classic policy error” from central banks if they keep raising interest rates while there’s a growth slowdown in 2019.

Joel Clark, CEO and portfolio manager at KJ Harrison, a high-net-worth investment firm, said the only place that’s broken even for the year is US and the question is whether the global growth scare lands in America.

He said that determining where we are in the business cycle is an important question for investors and that there are three things that could accentuate a potential slowdown.

He said: “One has to assume that if you are doing scenario analysis, the probabilities are higher that the future is going to be more risky than the recent past.

“If look at everywhere else in the world, it’s a nightmare out there – China is down 25, Italy is down 30, you got the Argentine currency down 50, you got oil from October down 30 and you’ve got the TSX down eight. The only place that is breakeven for the year is the US.

“The biggest question for 2019 is, does this growth slowdown or growth scare land on the door of the US? I think that’s what’s playing out.”

Clark said it’s becoming consensus that the bond market yields have “fallen over” and that the US is finally slowing down. However, he fears the Federal Reserve thinks we are in a hot market and wants to keep raising rates.

He explained: “You could have a classic policy error where central banks call liquidity out right when the economy is rolling over. That is one of the boogie men you have got to watch out for, that we don’t have a classic central bank policy error right when things are slowing down.”

Another warning sign for 2019 is the US-China trade spat, which he likes to an “economic cold war”, where the stakes are too high to actually embark on a war so countries resort to punitive measures, which in this case are trade and money. Clark believes it’s a flexing of muscles from both sides that will wear on the market’s confidence.

The final part in his trilogy of concerns for next year is the influx of trading volume from ETFs, index, options and quants, which has never been tested in a true bear market.

He said: “Markets take a long time to go up and take a few days to go down. A 10% correction like January/February … that took three hours. Everyone thinks it was a week but really it was three hours.”

He added: “It happens instantly because the quant funds actually have automatic sell programmes. Once you get below losing 2% it actually accelerates, so there is for sure liquidity risk out there.”

What should investors do to meet these scenarios head on with confidence? Clark said it’s all about tilting and flipping what worked previously on its head. Growth, momentum, cyclical investing is no longer doing the job, according to Clark, who believes investors should re-route into what’s now working: consumer staples, REITS, utilities and cash.

He said: “You have to be thinking more safety income because I don’t think you are going to have a recession. When you have a recession everything goes down but when you have a REIT or a utility, you can actually do well in a growth slowdown scenario.”

He added: “I think we are going to have real calibration and we should – that’s a healthy thing.

The longer you go on without a correction, the more risky it is so this is a good thing. More clearly we are in an economic cold war; we’re clearly on a ship for the populist governments around the world.

“That’s something we haven’t experience for a long time but we have in the US. And they are the only place in the world that’s open for business so I think that’s a good thing. There are always things to be worried about and it’s always about what the market is discounting and hopefully it gets to a point where it discounts enough to take more risk again.”

When it comes to the domestic economic landscape, Clark is withering in his assessment, although he believes that as an investor “where there’s blood there’s opportunity”.

As a citizen of the country, however, he has some choice words for Prime Minister Justin Trudeau & Co.

“It’s terrible,” he said. “They are more worried about legalizing pot than they are about protecting automotive jobs and the energy patch.

“They completely misread the situation and foreign investors, which is what is really needed for our country to attract capital. They are failing our country like mad and it’s no surprise the dollar is where it is.

“Until our government wakes up and addresses some of the structural things, there are too many places in the world you’d rather invest."