Time to keep a solid position in Canadian equities

The late stage of the market cycle is not the time to bail on Canadian equities despite evidence this is a growing trend among investors.

Brent Joyce, chief investment strategist at GLC Asset Management Group, said portfolios should not concentrate on too few sectors or regions and that broad-based exposure is the best strategy.

In the first of two articles looking at four common mistakes investors make at this stage of the cycle, we focus on underestimating equity risk and calming FOMO around chasing hot stocks.

With equities, Joyce said there is a real danger of letting your portfolio mix drift beyond your risk tolerance because of an assumption sectors and areas like, for example, healthcare, info tech and emerging markets, continue to perform well. Maintaining diversification strategies, therefore, are crucial.

He said: “We suggest you keep a solid position in Canadian equities. That is opposite to what industry evidence suggests people are doing right now.

“This type of all-or-nothing move from one region to another feels similar to the common thinking that occurred six or seven years ago when sentiment was negative towards US equities - due to the US credit rating downgrade by the S&P in 2011 - and investors poured ‘all in’ to Canada.

“In hindsight, that would have also been a time to be more balanced, like we are suggesting now, and not swing all or nothing into one region or another.”

Joyce said that timing the market at this stage is notoriously tricky and recommended taking profits from emerging markets or the info tech run and reallocating more broadly. He expects global growth to continue to do well and is, therefore, bullish on cyclical sectors, while despite the fact rising yields are weighing on interest-sensitive sectors, he thinks those “will do well when growth stalls, yields fall and people seek out safety”.

Joyce added that resisting the temptation to chase returns also applies to fixed income and said high-quality bonds should be a core component of a portfolio.

He said: “High-yield bonds had a very strong performance in 2017, but a repeat is unlikely in our opinion. High-quality investment grade bonds, not high-yield bonds, should form the core component of a fixed-income portfolio. When the inevitable slowdown eventually occurs, stocks will fall, central banks will lower rates, bond yields will fall and high-quality bond positions will be rewarded.”

FOMO, meanwhile, is a very real temptation among investors and Joyce suggests putting aside some “play money” so investors get their fix of market excitement via the likes of pot stocks or crypto-currencies. However, he warned: “Excitement is rarely seen as a good thing in investing, so here’s where it is perfectly okay to be boring.”

He added: “We remind investors that getting rich and staying rich are two different things, and reinforce the value of capital preservation and the wisdom of safeguarding the core of their investment portfolio; the nest egg they’ve worked hard to build.

“Stick with the foundational pillars of long-term investing and ensure you are diversified by geography, sector and asset class.”

Joyce said that the key takeaway for investors is that it’s not too late to take steps to shape your portfolio in preparation for a period where the markets will be more challenging than they have been over the past few years.

He said: “I’m not saying there is no place for information technology stocks, or emerging market exposure or high-yield bonds, as these are all useful tools for portfolio diversification. What I am saying is don’t get carried away with any one thing, and understand what certain tools in your investment portfolio can and cannot do when markets are less rosy than they have been over the past several years.

“In our GLC balanced funds, we have been taking down some of our equity over-weight positions and moving our asset allocations toward a more neutral stance for several months now. We have also reduced our high-yield bond exposure in our (GLC) income-oriented balanced funds.”

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