Bank’s head of portfolio management on ditching ‘cocktail stocks’ for quality
It’s time for companies to “show me the money”, with investors being urged to focus on quality over momentum heading into 2020.
With equity markets still appealing, economic numbers good and central banks supportive, the outlook is on riding the wave for another year despite ongoing trade noise.
Derek Massey, head of portfolio management at HSBC Global Asset Management Canada, does not forsee a recession next year but told WP there is a rotation happening in equity markets. Previously high-flying momentum companies are not performing as well, so firms with earnings, decent balance sheets and dividend payments are coming to the fore.
Owning these types of stock is preferable to the bond market when rates are so low, he said.
“I did a presentation with a chart showing that the 30-year yield on treasuries is now matching the yield on the S&P 500. My story is always this: would I rather spend $100 and buy a 30-year bond, clipping a 2% coupon along way and in 30 years, get my hundred dollars back. Or do I want to buy dividend stock where I get my 2% yield, but I have the possibility for growth over that 30-year time frame? It’s a no-brainer.
“That’s why equities are more compelling investment option at this stage over fixed income, although fixed income should always be there to support this volatility. The volatility is not going to go away.”
Massey's call for quality stocks means advisors should also be extra wary of what he calls “story stocks” or “cocktail stocks”, an example being the marijuana industry, which is not growing as fast as people thought it would, and have had a terrible year.
“That’s what you want to avoid,” Massey said. “You’ve really got to understand the dynamics of what you're investing in. It’s simple stuff: understand the companies and make sure they have got really good balance sheets.”
Having a dividend stock is particularly important at this stage of the cycle as investors insulate their portfolio from the next downturn. Now is not the time to be reaching for those growth momentum stories if they are not backed up by earnings.
As we head into the festive break, the portfolio manager also reflected on an “unbelievably surprising” 2019. Engulfed by negative news and trade tensions, both equity and bond markets just ploughed on. Underpinning this was the complete reversal of central banks, going from tightening to cutting straight away. It boosted the markets and caused many to overlook economic fundamentals as trade and President Donald Trump’s twitter feed dominated the news agenda.
However, while Canada’s job figures took a hit on Friday, the US numbers are strong. And while the effect of the early tariffs is now being felt in the manufacturing sector, industry is still growing.
Massey said: “Our base case is still the same; the trade rhetoric is just noise. We've got December 15, where hopefully some sort of phase one deal is ironed out, and as long as we have that, that gives us some certainty as we go through 2020.”
So if people feel secure in their jobs, consumer spending stays strong – Black Friday sales were good – and the Bank of Canada is ready to step in, Massey's outlook is broadly positive.
“If the [economic] numbers start to get a little worse next year, the Bank of Canada can step in and support both the economy and markets so we can continue on this path. The jobs number is the one that's concerning at this stage in Canada, but it looks still quite strong in the US.”
What would cause this scenario to shake? A speedier slowdown, especially in the service industry? A central bank with no more cuts to give? This would cause many to look to the newly elected Federal government for fiscal stimulus, including infrastructure spending like the Trans Mountain pipeline.
This is a situation mirrored around the world, particularly Europe.
Massey said: “You’ve got to make sure there are countries in Europe that have the balance sheets to be able to do that and not go further into debt. There's a few that do. Germany is probably a good example of some fiscal spending that can happen and that's really the engine for Europe.
“So you're going to have continued low interest rate policies, because we don't want to choke off what is somewhat spluttering economic growth, you've got the support from central banks on monetary policy, and now you've got fiscal spending that wasn't in the picture before.
