Looking at the long term is how advisors need to view the current market volatility, encouraging clients to be patient for the inevitable reward
As oil prices continue to languish and the loonie flounders, one investment expert sees opportunities to make real inroads in the long term.
“So much of this volatility is based on the short term, the here and now, creating exceptional opportunities for investors willing to think multiple years out – and in some cases multiple decades out,” says Tim Caulfield, vice president, Franklin Bissett Investment Management’s director of equity research and portfolio manager. “Therein lay the opportunity.”
The market has been witness to what Caulfield calls extreme weakness in the earlier course of this year, with the energy and material sectors dipping 20% - which makes for low-hanging fruit that is ready for the taking.
“Below the surface, we’ve seen such extreme weakness in specific individual securities that we can target those individual opportunities and find those dislocations in the marketplace that you can achieve by taking a passive approach,” he told WP. “I think ultimately where it becomes interesting is it is really about the long term of these businesses that is going to matter. How we get to where we’re going is less relevant than where we end up.”
Equity markets can be inefficient, particularly in the short term, Caulfield points out, with the price of equities not necessarily reflecting the true intrinsic value of the underlying businesses at all points in time.
“This has been the case in the Canadian equity market. And one of the reasons why would be the more cyclical components of the equity market in Canada, such as the energy sector, the materials sector,” he says. “An excellent example is that we’ve been experiencing for the last year and a half a severe downturn in the energy sector, driven by oil and gas prices.”
But what it really boils down to is whether or not the weakness in equity prices is a fair reaction or an over or underreaction.
“In many cases we’re seeing pretty significant overreactions, where fear has taken hold of the energy sector of the Canadian equity market,” says Caulfield. “And in some cases underreactions – but it is through all of that inefficiency and dislocations between the price of the security at any one point in time, and what the true value of the business is based on its long term globalized, full-cycle profitability. It can create such attractive opportunities.”
“So much of this volatility is based on the short term, the here and now, creating exceptional opportunities for investors willing to think multiple years out – and in some cases multiple decades out,” says Tim Caulfield, vice president, Franklin Bissett Investment Management’s director of equity research and portfolio manager. “Therein lay the opportunity.”
The market has been witness to what Caulfield calls extreme weakness in the earlier course of this year, with the energy and material sectors dipping 20% - which makes for low-hanging fruit that is ready for the taking.
“Below the surface, we’ve seen such extreme weakness in specific individual securities that we can target those individual opportunities and find those dislocations in the marketplace that you can achieve by taking a passive approach,” he told WP. “I think ultimately where it becomes interesting is it is really about the long term of these businesses that is going to matter. How we get to where we’re going is less relevant than where we end up.”
Equity markets can be inefficient, particularly in the short term, Caulfield points out, with the price of equities not necessarily reflecting the true intrinsic value of the underlying businesses at all points in time.
“This has been the case in the Canadian equity market. And one of the reasons why would be the more cyclical components of the equity market in Canada, such as the energy sector, the materials sector,” he says. “An excellent example is that we’ve been experiencing for the last year and a half a severe downturn in the energy sector, driven by oil and gas prices.”
But what it really boils down to is whether or not the weakness in equity prices is a fair reaction or an over or underreaction.
“In many cases we’re seeing pretty significant overreactions, where fear has taken hold of the energy sector of the Canadian equity market,” says Caulfield. “And in some cases underreactions – but it is through all of that inefficiency and dislocations between the price of the security at any one point in time, and what the true value of the business is based on its long term globalized, full-cycle profitability. It can create such attractive opportunities.”
