The old adage “sell in May, then go away” may be a mantra some investors live by, but don’t pack the kids up and head to the cottage for the next six weeks yet. For those who do their homework, there still may be some opportunities to make money, says David Andrews, director of Investment Management & Research at Richardson GMP.
“Technically, the market is in a downtrend,” he says. “I think if you’re going to sell the markets and go away, that’s probably a good thing, but at an individual security level, there are opportunities.
In his latest Monthly Marketpoint, Andrews forecasts a summer season with “neither sizzle nor fizzle,” with the positive, micro-level news of higher-than-expected earnings tempering the prevailing bad news, including debt issues in Europe, a feared slowdown in China and recent softness on the U.S. economic data front.
Globally speaking, the economy appears to be a mixed bag right now.
The U.S. and Europe continue to struggle, and hopes of a U.S.-led recovery are quickly fading. May retail sales in the United States were weaker than expected, home sales were down and despite May employment data showing 431,000 new temporary jobs were added, permanent-job creation has been lackluster.
Even the Federal Reserve has cut its growth outlook by about 0.25%.
Meanwhile, in Asian markets, governments are again moving to tighten monetary policy in an effort to curb runaway economic growth. As a result, China’s GDP growth slowed to 10.3% in the year’s second quarter, from 11.9% in the first quarter.
But considering 3% is considered good growth in North America, and 5% is stellar, maybe long-term double-digit growth doesn’t look all that bad. So while China may be slowing down, Andrews likens it to moving out of the passing lane and into the middle lane on the highway.
Clearly, “the developed world is going to be led [out of recession] by the developing world,” with possibly a few Western countries remaining competitive.
Canada is one such country, Andrews asserts. In comparison to the U.S., our situation looks almost rosy, with 93,000 jobs added in June — no small feat when you consider the job gains over the past three months equate to the U.S. adding 2.5 million positions. “Clearly, we’re on track for recovering the jobs lost in the recession. Canada’s in a very good spot.”
So what does this all mean for advisors and their clients’ summer investment strategies?
Basically, if you’re leaning towards equities, Andrews says liquid, dividend-paying companies with defensive characteristics — the stalwarts that generate consistent cash flow — are the best bets. Andrews suggests non-cyclical stocks like telecoms and health care companies, but not necessarily financials, as regulatory reform could limit dividend growth in the short-term.
Alternatively, high-yield bonds appear the way to go in the fixed-income segment. Andrews notes that they’re trading at a steep discount to Government of Canada bonds or treasuries, despite lower default levels and increased corporate profitability.
On the alternative investment side, REITs appear to have good growth potential, following a year of amassing cash. “They’re a typically under-invested asset class in Canada,” says Andrews. And with the expected conversion of business trusts before the 2011 deadline, some income-trust investors could redeploy enough funds “to make an impact on the REIT market” — especially when some of these investments are “yielding the same amounts as high-yield bonds.”
Bottom line, Andrews thinks we’re likely to see markets continue in a range-bound fashion until some sort of catalyst emerges, but adds that we’ve already seen a correction between April and June.
“At some point,” he asserts, “the market is going to realize that things aren’t as bad as we thought they were, and you’re going to see pockets of increases.” Things are going to end up somewhere between sizzle and fizzle.
(07/21/10)