When it comes to evaluating how well people “read” the macro picture of financial markets, it is important always to distinguish between skill and luck. And it is really only with the passing of time, or evolvement of a number of market cycles, that one can separate the wheat from the chaff.
Donald Coxe, Global Portfolio Strategist of BMO Financial Group, is one of a select group of analysts that have been remarkably right on the “big picture” outlook for many years. My market views essentially concur with Donald’s investment recommendations as published in the February edition of Basic Points (courtesy of J’s Global Analysis). I have therefore deemed it opportune to share his words of wisdom with you in the paragraphs below, especially also in the light of the difficult juncture in financial markets.
1. Long-term investors should remain heavily overweight commodity stocks, including the base-metal stocks. As the bear market grinds on, use days of stock market weakness to add to commodity stock exposure. They not only remain the asset class with the best earnings outlook, but also the asset class that is least understood by conventional asset allocators, who still see them as cyclicals dependent on OECD growth.
2. In the near term, the golds will continue to outperform stock markets and to act as a form of hedge against two kinds of shocks – financial panics and inflation shocks.
3. Remain heavily underweight bank stocks, and financials tied to “Jurassic Park Avenue” excesses. Within the financial group, overweight high-quality fire and casualty companies, life insurers, and asset management organizations.
4 Retain above-average cash positions, preferably in strong currencies.
5. Where possible, borrow in dollars and invest in assets denominated in strong currencies.
6. The Canadian dollar remains the Western currency with the best fundamentals. Canada’s problems arise because the Great Lakes are an insufficient barrier to the flow of bad economic and financial trends from the South.
7. Within the commodity groups, continue to emphasize investment in companies with long-duration unhedged reserves in the ground in politically secure regions.
8. The growth of sovereign control of energy assets means that the supply-side response to record-high oil prices will probably be inadequate to meet relentlessly growing global demand. Too many Third World governments with rich oil reserves have too many other demands for cash to reinvest heavily for the long term in new production. Retain exposure to the shares of producing Alberta Oil Sands companies with reserves that could outlast this century.
9. Long-term-oriented investors should use any temporary pullback in base metal producers to build their portfolios for the Final Movement of the Sonata – which will be the longest and loveliest performance of metal music in history.
10. The Treasury yield curve is now in recession mode – low yielding and upward sloping. It is of investment merit only for those who expect a long, deep recession. The Ten-Year note, with a negative real yield of 50 basis points, should appeal only to those who believe the recession will be accompanied by deep deflation. Oddly enough, credit spreads, though they have widened from their record-low levels, do not discount any recession at all.
We think bond investors should go for short- and medium-term high-quality non-Treasury paper – preferably in currencies other than greenbacks.
11. Defence stocks remain attractive, even if Democrats win it all in November. The next president may well choose to speak more softly than the incumbent, but if he or she doesn’t carry a big stick, the jihadists won’t listen.
As an added bonus, click here for Donald’s most recent webcast, dealing with the case for commodities and resources stocks.
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