Hone in on underlying investments rather than look at today's macro outlook
A recession is unavoidable now and could continue for the rest of this year, says one portfolio manager, who is urging advisors to stay the course with their investment plans for now
“There are a lot of things going on in the world today and a lot of people are stepping back and looking at their portfolios in a macro context, which is interesting, but not as useful as zooming in on the underlying investments themselves and the fundamentals of the business they own and the work they had done in advance of this year’s drawdown,” Kevin Burkett, a portfolio manager with the Victoria-based Burkett Asset Management, told Wealth Professional.
Burkett said the inflation data is already showing that the U.S. Federal Reserve has set itself on a collision course with the stock markets because he does not believe it can control inflation in the way it hopes while also achieving a soft landing in the markets.
“While it’s difficult to know for sure that inflation peaked earlier this summer, and we hope to see inflation numbers recede, we expect continued surprises in both directions,,” he said. “There is a rising risk of recession, and we see that it’s arguably now unavoidable, and that drove the late summer volatility. We think that’s going to continue for the balance of the year.”
He said housing prices will decline, “with a wealth destruction that could prove generational in its magnitude”. But, he believed that the settling early this year was necessary for the continued health of markets and it would prove positive for long-term investors, especially since cryptocurrency and the non-profitable technology businesses were not sustainable.
Read more: Investing in semiconductors
On the other hand, he said that businesses that are benefiting form the current market dynamics or have strong prospects – such as grocers – will increase traditionally narrow margins. Software businesses will also do well as businesses move from labour to more digitization of core functions. He said valuations for semiconductors, which have had a global supply crunch, have recently have made that sector attractive. Healthcare is also not tied to the economic cycle and pharmaceuticals have recovered. He expected bonds to continue to look good.
Read more: Investing in bonds
Burkett said that advisors should discern which changes are permanent versus transitory and be careful not to mistake temporary changes as permanent or vice versa. “That’s the art in being successful in managing portfolios for clients,” he said.
“If your strategy requires a wholesale change in the midst of a market correction, that would suggest that the original path that you set out to follow wasn’t a good one,” he said. “The time to make changes was at the end of last year, and I’m comfortable that our firm made all the changes that it needed well in advance, which wasn’t so much about trying to predict where we are in the economic cycle, but more ensuring a resiliency in portfolios by constructing something that was all weather.”
