Veteran of volatile periods shares her views on technology stocks, outlines Mackenzie's short-term tweaks, and explains why she believes equity fundamentals will prevail
Lesley Marks is well versed in volatility. The CIO, equities at Mackenzie Investments began her career as a portfolio manager on October 1, 1998, smack in the middle of a global collapse in long-term capital brough on by the Asian financial crisis. In the past 25 years she’s navigated the tech wreck, the Great Financial Crisis, and COVID-19. In the middle of what’s been a tough year for equity markets, she’s using that hard-won experience to navigate.
“This year we have been reminded that investing can be humbling,” Marks says. “You can have the right investment thesis, but the outcome and what plays out can be quite different. There’s certain relationships that we come to expect between the economy, earnings, interest rates, stocks, valuations, bonds, etc. In the short-term those don’t always hold, but in the long-term I still believe that fundamentals prevail, and things will play out as you would expect them to.”
Marks was one of the authors of Mackenzie’s mid-year outlook published in June. That document predicted headwinds for equities given the ‘higher for longer’ interest rate regime. As a result they advocated for a modest underweight on equities. While equities proved stronger than expected in the summer months, in September they have come under pressure in line with what Marks and her team predicted.
Can tech lead markets again?
The technology sector has arguably been the lynchpin for equity markets this year, just as it has for the better part of the last decade. Marks explained that the initial recoveries we saw in tech early in 2023 came as markets began to predict a slowdown in rate hikes, or even rate cuts, this year. Even when those cuts didn’t come—in part due to continued economic strength—markets became enamoured with artificial intelligence (AI) and drove some of the largest names in technology higher.
Now it seems that some of the AI euphoria has died down and valuations for tech stocks appear high. Marks still sees that sector as having great potential to deliver great long-term return on equity—as it has in the past. However, the short-term headwinds in the face of higher interest rates mean that tech may no longer be the market-leading sector.
Right now Marks sees greater leadership potential in traditionally defensive sectors like healthcare and consumer staples. She also sees opportunity in sectors and subsectors with less economic sensitivity, including industrials and some non-bank financials.
“I think there are pockets where you can find less economic sensitivity,” Marks says. “Low capital requirements, sustainable cash flow, healthy dividends, these are all areas where I think you would find attractive opportunities.”
Where Marks sees opportunity for advisors
In the face of rising rates, Marks sees many investors and advisors reconsidering the attractiveness of equities. She notes that in October of last year the S&P 500 was trading at around 17.5x earnings and the 10-year US treasury yield was around 3.6%. Today the S&P is at 21x earnings and interest rates are around 4.5%. In these conditions, she says, a lot of stocks won’t offer such an attractive value compared to 4.5% guaranteed returns for 10 years.
“Finding value underneath that headline of the S&P 500 is going to be more challenging, but there are going to be opportunities,” Marks says.
While she acknowledges fixed income can look attractive now, Marks notes that as we begin to see a deeper economic slowdown as a result of interest rate increases, there should be greater indication about the next economic cycle beginning. When that comes, she expects greater clarity on where opportunities lie for investors.
Marks already sees potential offshore. She notes that over the past tend years investors have tended to be over-indexed to large-cap US growth stocks. They’ve been rewarded for that, but recent shakiness in tech should prompt a reconsideration. She now sees other developed markets, namely Europe and Japan, as showing strong signs. Japanese equities, for example, are often under-allocated but are up almost 24% on a local currency basis year to date.
As advisors seek out these opportunities, and await greater clarity on the economic cycle, Marks believes they can prepare by reassessing their clients’ portfolios. Given we are likely to stay in a higher interest rate environment—the highest we’ve seen in over 20 years—she thinks a sensitivity analysis is called for.
There is also opportunity presented by higher rates, and where advisors may have taken on more risk for their clients to achieve higher yields, there are now lower-risk higher-yielding options. In a market still shaped by uncertainty, however, Marks’ continues to advocate for diversification.
“In a diversified portfolio, you're always going to have things that are working and things that aren't. Often advisors are seeking to have investments that everything is working all the time, and that's not realistic,” Marks says. “Making sure that you're assessing a portfolio based on the risk adjusted returns, and not just absolute returns, is really important. Adding some other asset classes to the portfolio can really smooth out or improve the risk adjusted returns for your clients and the importance of that should not be understated.”
