The current market situation

How HA&A is working to protect your investments.

You may already be aware that the past few weeks have been a trying time in markets around the world. Markets have been volatile and are being pummeled across the globe. None are showing a positive return of late. Typically, in times such as these, bond markets provide a safe haven or an option in which to take shelter, but unfortunately, this is not the case at present.

How things have changed

There are many difficulties facing retail (and particularly Canadian) investors. There are also many issues currently at play in worldwide markets. The slide below depicts the risk profile it took for investors to achieve “decent” returns over the past 30 years. As you can see, it didn’t take much to achieve a 7.5% return in the 90s. A significant portion could even be held in cash-type investments such as bank accounts with no investments in the stock market at all. The degree of volatility was quite low and really only influenced those seeking the 10-12% rates of return. Many of us took those returns for granted back when we they were achievable by simply being patient.

Fast forward 30 years, and we can see that much has changed with investors needing significantly more aggressive investments to make close to the same 7.5% with substantially more volatility and patience required to achieve the 10-12% returns we all sought. Loosely worded, volatility and risk really mean variability and those awful ups and downs in market valuations that we all know and hate which are currently being experienced across the globe.

How we’re managing the current tide

Rather than simply sitting tight and riding the wave, we have actively secured other investments which have not suffered at the hands of market volatility nor been victims of lower values typical in bond markets with rising interest rates. We have continued to add both the Rockridge portfolio and the U.S. Apartment Limited Partnership (USALP) for qualified investors and are happy with the stability these products have added to our clients’ accounts. Unfortunately, this alone cannot hold back the tide when volatility takes a broad swipe across the board and pounds even the best-valued companies and markets. Even our own stable and profitable financial sector has not been immune.

When looking at market indicators and sociopolitical factors influencing markets, we often see these types of corrections (largely fear driven) as true value opportunities for savvy investors. And while we are cautious, we are active as well. We look to build our clients’ wealth by adding items that rarely go “on sale”. People often ask, “How do you tell the difference between real issues and those which are often more fabricated in nature?” Simple. Looking at economic data and strength, we see continued growth here at home and in many parts of the globe. However, when we see the value of markets (and all the companies within them) changing their market valuation by 2 or 3% or even 10% on a weekly basis, we realize this isn’t an accurate reflection of the real value of these companies.  Rather, they are more like bets people are taking on what might happen down the road on the off chance that interest rates move significantly over the next few years.

Keep calm and carry on

While frustrating, it’s most important to remain steady in one’s approach. Ours is to seek good valuation and look for long-term momentum in companies that continue to grow and have positive outlooks. We couple this with innovative products like Rockridge and the USALP that go far beyond the mainstream solutions available to other investors. We also look at quantitative indicators which help us to evaluate where these opportunities lie and when best to take advantage of them. At times the answers are not 100% clear and we too need to be patient.

Again, looking at the chart above, we need to realize that, yes, times have changed since the 90s and they will continue to change. If interest rates rise over the next few years, it will allow us to return to bond asset classes in order to offset the markets’ occasional roller coaster rides. However, being over exposed to these fixed products during a period of rising interest rates will most certainly result in below-average, and possibly even negative, results. This is as pressure on the capital side more than offsets the (still relatively low) interest rates on the bonds themselves. An option to hold a fixed-rate GIC that ensures a negative return after tax and inflation and guarantees the erosion of capital over time is not an option at all. So, the bad news is that we must accept the volatility for now. The good news is that opportunities will come from this and we are actively seeking them out for you.

While Q4 isn’t starting out too hot there is still a long way to go. We will continue to manage risk and return on your behalf. As always, please don’t hesitate to contact us if you have any questions or would like to discuss this topic further.

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