Time for a dose of risk aversion

Given volatile financial markets and a ‘muddy’ economic backdrop, AGF’s CEO suggests that investors hold a cautious stance

Time for a dose of risk aversion

For those with just a cursory knowledge of the financial markets, it might be tempting to outright cast investors as either optimistic bulls or pessimistic bears. But the reality is that selecting one attitude over another is a judgment call made on a balance of multiple factors and signals.

Right now, any choice would be arguable. Some might take a negative position, in line with the IMF’s recent forecast that the global economy is headed for its slowest growth in a decade. Others might want to organize their portfolios more bullishly, especially when they consider equity valuations to be attractive relative to fixed income.

But for Kevin McCreadie, CEO and chief investment officer at AGF Management, it would be wise to consider a shift toward cautiousness as signs of a late cycle abound.

“It’s been one year since U.S. recession fears took their first good hold with investors and sent stock markets into a nose dive through the final weeks of 2018, but not much has changed in the intervening months,” he said in a recent blog post.

While acknowledging that the S&P 500 has rebounded and moved within a range of all-time highs, he noted that 10-year U.S. Treasury yields have plumbed historic lows. The conflict between the U.S. and China, in addition, continues to cast a pall over the global economy.

“If anything, the economic backdrop has gotten even muddier in recent weeks,” he said. He cited September’s U.S. jobs numbers released by the country’s Bureau of Labor Statistics, which reported a decrease of 275,000 in the number of unemployed individuals. That translated to an unemployment rate of 3.5% — its lowest level in 50 years.

“While jobs data is typically considered a lagging economic indicator, the numbers … gave equity prices a temporary boost when they were released and suggests the U.S. economy still has life to it,” McCreadie said.

Any reassurance from the jobs numbers would have been dampened by the latest Purchasing Managers Index (PMI) survey, which indicated a deeper contraction in U.S. manufacturing. Citing the Institute of Supply Management (ISM), McCreadie said the country’s PMI score has declined from a high approaching 59.3 in November to 47.8 last month.

He also noted factors that likely warped the most recent data, including a forced stockpiling of inventory by General Motors due to a strike and a reduction of shipments in Boeing 737 Max planes until at least Q1 next year as safety concerns prompt a widespread grounding of the aircraft.

“At the same time, it’s clear that the toxic global trade environment is taking a toll,” McCreadie added, pointing to a continued fall in demand for trucking, as well as numbers of new export orders that have plunged to their lowest level in several years.

That cocktail of conflicting signals, coupled with the economic fallout in Europe due to Brexit, has contributed to volatility in the financial markets. The events of the past year shouldn’t be surprising, McCreadie said, as they point to an inevitable recession — though determining the exact timing is almost impossible.

“[L]ate cycle data has always tended to be convoluted much like it is today,” he said. “In recognizing that, investors who maintain a cautious stance may benefit more than those who are less risk averse.”


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