MARKET COMMENTARY

Investing at the Crossroads of Two Decades

Ian Riach and Manmeet Bhatia reflect on lessons of the last decade and themes—from technology to expected returns—for the new one.

01.24.2020 - Ian Riach, Chief Investment Officer

Manmeet Bhatia, CFA, LIFA, CLU, CFP, CIM
Head of Private Wealth
Fiduciary Trust Company of Canada

Ian M. Riach, CFA
Chief Investment Officer
Fiduciary Trust Company of Canada

Investing at the Crossroads of Two Decades

 

In this special edition of the RoundTable, Manmeet Bhatia and Ian Riach pause to reflect on the ground covered in the last 10 years and the path ahead. From the tulip mania of 1637 to investing in this current age of technology, see what they’re saying about managing money to help achieve your goals.

 

Q: From your vantage point, how will history view the past decade?

Ian Riach: It has been eventful to say the least, starting with the global financial crisis, the European debt calamity, Brexit, other trade concerns and the rise of populism. Since the “great recession,” we have seen unprecedented and coordinated central bank participation worldwide. Ongoing accommodative monetary policy and low interest rates have supported the strong performance of this historic equities bull run. Meanwhile, inflation has remained fairly subdued and, despite governments worldwide providing fiscal stimulus, economic growth has been low by historical standards. This scenario is puzzling for economic historians. Some pundits have labelled it the most hated recovery in history.

 

Manmeet Bhatia: This has been a decade of great transition as advancing technology has evolved from an optional element to a dominating force in our lives. For instance, consider that the number of smartphone users worldwide rose by approximately 700 million from 2016 to 2019.[1]  Think about the ongoing rise of artificial intelligence and how Amazon’s Alexa, Google’s Assistant and Apple’s Siri are now an integral part of daily life. The ripple effects are far-reaching.

 

Q: How has technological innovation influenced investment management?

Manmeet Bhatia: One example is the rapidly growing use of internet-based stock research coupled with strong equity markets, which has led many investors to believe they are able to consistently pick winners. Ultimately, all bull markets either come to an abrupt end or grow tired and stagnate.

 

During periods of heightened volatility, capital preservation takes precedence over high growth, and professionally constructed portfolios—focusing on fundamental research and a disciplined process—return to the forefront of investing.

 

From another perspective, through our relationship with Franklin Templeton Investments, we are continuously leveraging leading-edge technology to support portfolio managers’ work and to enhance our client experience. We are always exploring how technology can help improve all aspects of our business.

 

Q: What was commonplace in the 2010s that may change ahead?

Ian Riach: Complacency has been creeping back into markets as investors have experienced low volatility and higher than long-term average returns for a while. This applies to both stocks and bonds. We all suffer from “recency bias,” putting more weight on what happened recently when making decisions. We do not expect returns in the next seven to eight years to match those of the past seven or eight. Low interest rates, slower growth and current valuation levels all point to lower expected returns going forward. Working with their advisor/portfolio manager, we believe investors would be wise to “recalibrate” expectations, fight the pull of recency bias, and align the new reality with their goals.  

 

Q: How is demand for sustainable income in this low-rate environment influencing the way we work to help achieve client objectives?

Manmeet Bhatia: Conservative portfolios leaning largely towards interest and dividend yields are not necessarily the panacea they once were. Tilting a portfolio to bonds may not provide the cash flow necessary to sustain an investor’s income needs. Similarly, the demand for yield has led to the appreciation of so-called bond proxies, or high-yielding stocks, which are now in overvalued territory.

 

We believe security selection within a sector, versus broad based exposure to a sector, will take on greater importance as the search for yield continues in this environment. We are also seeing demand for different forms of income continue to escalate, giving further rise to the use of alternative investments. 

 

Q: Is there a stock that epitomizes the last decade?

Ian Riach: The so-called FAANG stocks—high-growth, technology-oriented companies like Facebook, Amazon, Netflix, etc., are certainly worth noting. There was also the commodity boom about mid-decade where the stock of any company with “oil or gas” in their name shot to the moon. Unfortunately, this important sector has experienced a painful downturn and many stock prices have fallen close to zero.

 

Manmeet Bhatia: I would focus on those companies representing lost opportunities. Over the last number of decades in Canada, several companies have, for a short while, held the title of largest company by market capitalization. Some of them are now delisted or have seen significant declines. Such rapidly rising, quickly falling stars should remind investors that strong balance sheets and cash flow generation are never out of favour for the long term, despite short-term noise that may underappreciate or undervalue their respective stocks. It is important to avoid noise that veers focus away from a disciplined investment approach.

 

Q: What underappreciated themes could gather momentum or emerge next?

Ian Riach: Given current trade uncertainty, I think many investors have lost sight of the longer-term potential for emerging markets. Most such markets have significantly restructured their economies, are less reliant on external debt to grow, less vulnerable to economic dislocations, and have higher growth prospects than developed markets. Yes, they are subject to political risks; however, they are in much better shape than just 10 years ago. Given trade concerns, we are somewhat cautious in the short term, but longer term we are much more constructive on emerging markets.

 

Taking a step back, markets are said to climb the “wall of worry.” Some of my comments might lead investors to think I am negative on markets. Not so, especially in the long term. Right now, risks seem to outweigh the potential for excess returns. High valuation levels and decelerating growth data mean that some caution is warranted.

 

Manmeet Bhatia: Cash remains a safe haven investment in times of uncertainty. Holding cash balances should not be viewed as a lack of action, but rather a measure to not force an investment while waiting for appropriate price points to enter quality investments. 

 

 

 

Q: “The more things change; the more they remain the same.” How does this apply today?

Ian Riach: Every market cycle, we hear “it’s different this time.” Looking back to the tulip bubble of 1637, it’s true to some extent as each market cycle is defined by different events. But, eventually fundamentals come to the forefront. What should remain constant is an investor’s commitment to what I call “first principles”—focusing on long-term goals and understanding one’s risk tolerance.

 

Manmeet Bhatia: History has shown that chasing short-term returns inspired by different industries and/or sectors driving market performance often results in long-term underperformance and heightened risk in the form of non-compensated volatility.

 

Yes, it is important to ensure a fluid investment strategy, taking into account the world’s constant state of change. Yesterday’s rules do not necessarily apply to tomorrow’s metrics; however, focus, discipline and adhering to fundamental analysis are areas that have not, and will not change.

 

Yesterday's rules do not necessarily apply to tomorrow’s metrics; however, focus, discipline and adhering to fundamental analysis are areas that have not, and will not change."  Manmeet Bhatia

NOTES:

1.“Number of smartphone users worldwide 2014-2020,” Statista, September 2019, https://www.statista.com/statistics/330695/number-of-smartphone-users-worldwide.

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