Advisor dialled into market contradiction ahead of potential recession

After his portfolios stood up well to the tests of 2022, Wolfgang Klein explains how he’s approaching current uncertainty

Advisor dialled into market contradiction ahead of potential recession

Wolfgang Klein had the best year of his career in 2022 but is watching the markets like a hawk as we head toward a potential recession.

Klein, senior portfolio manager with Canaccord Genuity Wealth Management in Toronto, told WP his three portfolios were resilient last year and fell only about 6%. To put that into context, the S&P 500 was down almost 20%, its worst annual return since 2008.

The bulk of his clients’ money is in Klein’s growth strategy and he credits its success to remaining fluid, reducing its technology position, and having good exposure to oil. He said: “We were positioned right going into the year [2022] and we continued to work toward capital preservation and trying to stay on the themes that were working.”

While he’s been telling clients 2023 will be different, his strategy this year is to continue to watch the market and adjust his sales to the gales. He added that with strategists from Morgan Stanley - and even Canaccord’s own – thinking we are heading into a recession, this is likely priced into the market. Investors, therefore, should take a cautionary stance.

The twist, he said, is that the market is saying something different. With central banks tightening monetary policy and slowing the economy, both bonds and stocks are bucking conventional wisdom and “fighting the Fed”. “Let’s see who is right,” Klein said. “The two forces are at play and it’s going to be very interesting to see how the year plays out.”

Portfolio positioning

Klein himself is bracing for a recession. His reduced his tech weighting down to almost zero last year and then recently rebuilt it back to about 15% of his equity exposure. While he notes he’s not chasing the market, but following it, he is buying “some falling angels”, especially names that are down 50% to 75% from their zenith. However, he still doesn’t want to get too aggressive on tech.

Klein, who focuses on North America, also has some resources and real estate in his profile, but no staples and no gold. He’s also lightened up on oil and is overweight consumer discretionary, betting that the consumer at the high end, like Ferrari, Luis Vuitton, and Mercedes Benz, will continue to be fine. He is also positioned for the consumer who will be challenged by the recession and shops in Dollarama and Tim Horton’s.

“I’ve made a lot of changes this year,” he said. “It’s probably been the most active management that I’ve conducted in a long time. But you have to remind yourself that a portfolio can be like a bar of soap: the more you touch it, the smaller it gets. There’s a fine line between hanging on and riding out some volatility and having quality businesses and trying to be right all the time. You must be careful you don’t overthink and overwork the portfolio, but you can’t remain static, either.”

While Klein says most strategists believe the market may make new lows and remain at best under pressure, he doesn’t necessarily agree. While some stocks are bouncing back and bonds are doing better than they have in a long time, he believes the balanced portfolio will work better than it did last year. “The 60-40 is not dead,” he said.

Interestingly, Klein is seeing more clients hand over all of their meme stock accounts, or what’s left of their crypto, for more prudent money management. Quality investments continues to do fine but junk is junk and, as it turns out, many clients had junk on the side. As a result, the speculation prevalent during the pandemic is easing and normalcy is returning.

Klein said: “We’re seeing clients who have 95% of their money with us and then, unbeknownst to us, have a small account on the side. It’s funny: we’re receiving those accounts now in droves. They’ve realized they had their heads handed to them trying to buy meme stocks or bitcoin and crypto during COVID.”