After President Trump lost out on healthcare reforms, investors reacted. The U.S. dollar fell, global markets slumped and confidence around the new president’s ability to implement tax reforms dwindled. Yet, despite the concern, markets mainly bounced back: the greenback recovered some its lost ground and world equity markets are once again heading higher. There seems to be only one certainty in this unexpected new normal: it’s going to be a bumpy ride.
“We’ve already seen some indications that much of what the Trump administration would like to enact is being met with quite a bit of resistance, which could further delay the benefits from his proposed policy changes,” says Keith Lam, CFA, Associate Portfolio Manager, CIBC Asset Management
. “And this is all occurring at a time when the Federal Reserve has embarked on a rate hike cycle, as they attempt a smooth transition from monetary stimulus to fiscal. I worry the Federal Reserve, which has been overly optimistic on its forecasts in the past, will again be forced to temper their expectations and that of the market.”
In the current market environment, Lam sees certain names in the industrials and financial services sectors as presenting interesting risk-reward opportunities. He also sees gold as a compelling area at the moment. “Gold names with low all-in sustaining costs, strong free cash flow generation, strong balance sheets, with some exploration upside could be a good hedge for the overall portfolio if economic growth disappoints,” Lam, who was a recent speaker at CFA Society Toronto’s Equity Investment Symposium, says.
When looking for opportunities in challenging market conditions, Lam screens names based on numerous balance sheet, cash flow and income statement metrics (in that order). He uses a range of macro inputs and asset classes and assesses the credit market, options market, volatility and yield curves to help narrow down his list of potential names. “My style typically leads me to names that for whatever reason fly under the radar or trade at large discounts to intrinsic value that I believe are unjustified, and there are identifiable catalysts that can either increase intrinsic value, narrow a securities discount to intrinsic value, or in a best case both,” Lam says.
In order to successfully navigate the current markets, Lam encourages advisors to adopt an active, nimble approach. “There is so much going on, and a lot of risks in the marketplace, but it appears that only some are going noticed,” he says. “Continuously update your information, re-test your thesis, and see if there are any material changes. I’ve always felt selling stocks is the hardest part of this business, but often those who can sell effectively do well and preserve capital.”
Lam also suggests advisors implement a balanced approach at the moment even if they are bullish on economic outlook. “It doesn’t hurt and would be prudent to have some hedges in place to protect your capital in the event things turn out different than your expectations,” Lam says. “Even if you are 90-95% confident that a scenario will playout as you expect, you are protecting against that 5-10% chance it doesn’t, and those are often the situations that end up hurting the most.”
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