One of the most difficult things to do is to stay level-headed in the midst of uncertainty. Sudden shocks, however small, can induce an exaggerated focus on the short-term. This is exactly the approach that Mr. Tyler Mordy, president and CIO of Forstrong Global Asset Management, advises against in a recent commentary.
“As usual, popular perspective is driven by hype. The focus being promoted today, of course, is an increase in global uncertainties. Fears [brought about by Brexit] are being fanned. That sells newspapers and keeps investors distracted,” says Mr. Mordy. “During times of shorter-term uncertainty, it is critical for client portfolios to remain oriented toward longer-running ‘super trends.’ ”
One of three trends which he predicts “will have an outsized impact on client returns in future years” is an overly pessimistic perception of China’s debt. He says that while China does indeed have an enormous amount of debt–it exceeded 220% of GDP by the end of 2015, he reports–Chinese households have assets that are far larger than their liabilities, and most of the debt has been used for infrastructure buildup. Thus, the debt situation is less dire than it appears, and Chinese assets should remain as core holdings in globally balanced portfolios.
The second trend he identifies is a possible revival in the Canadian economy. With Prime Minister Justin Trudeau’s advocacy for “responsible deficits” fueling optimism, the Bank of Canada keeping a dovish stance on interest rates to offset risks from low crude oil prices, and Canadian investors starting to invest global diversification (“Canada is now a creditor to the US for the first time on record, reflecting Canada’s renewed love affair with assets south of the border”), there is some hope and optimism to be seen despite generally bearish market conditions.
Finally, he points to prevailing low interest rates and slow growth, which open “a wider set of possible future scenarios.” According to him, these conditions emphasize the importance of diversification. “While market participants continue to be polarized between extreme ‘bullish’ and ‘bearish’ views (neither being our core scenario), portfolio insurance should always be in place.”
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