SprottWealth Insights

Outlook for 2016

The first few weeks of 2016 have seen a large amount of market volatility. We asked some of the best portfolio managers in the country for their opinions on what has taken place, what to expect for the rest of 2016 and how they are positioning themselves for the year. For quick reference, we have summarized their thoughts below:

Tye Bousada, Partner, Edgepoint Wealth Management 

  • Fear is back with a vengeance, causing investors to flock into safety sectors (Consumer Staples, Telecom, Utilities and Healthcare).
  • Businesses in these safety sectors are expensive and are not likely to grow very quickly over the next 3 – 5 years.
  • Remember – the stock market is simply a meeting place for buyers and sellers of businesses. Investors tend to treat it as a predictive tool or guide for their investment decisions.
  • We are attempting to invest in businesses that are likely to have material growth in the future even if the economy is not the best - where we can buy growth today without paying a premium for it.
  • Historically, we have added value by capitalizing on volatility such as this and we are currently finding opportunities because of fearful investor sentiment. Volatility is the friend of the investor who knows the value of a business and the enemy of the investor who does not.

John Wilson, CEO, Co-CIO & Senior Portfolio Manager, Sprott Asset Management 

  • The volatility seen in the first couple weeks of 2016 can largely be attributed to China’s growth and stock market problems.
  • We do not believe this will affect stocks over the medium or long-term but it has had a huge effect in the near term.
  • Two areas that are outperforming are the US Dollar and gold. Canadian gold producers are particularly attractive because their input costs are largely CDN and energy based (both depressed) and their output is USD based (spot gold).
  • We do not believe the current fundamentals justify a bear market in either US equities or non-commodity Canadian equities. That said, market conviction is very low and technical indicators, including breadth and overall support levels, have been deteriorating for some time now.

Fiera Capital 

  • The overall tone in the markets in December was one of caution as investors anticipated the impact of the first fed funds hike in almost a decade, China growth problems, and the ongoing commodity rout.
  • Global equity markets experienced declines in December and fixed income markets outperformed because of the increased demand for safety.
  • The CAD hit a 13-year low and the Canadian economy lost steam due to downward pressure on oil prices and lackluster employment and retail sales data. However, the Bank of Canada appears comfortable to await the effects of past interest rate cuts, a weaker CAD and a stronger US economy to fuel growth.
  • The Fed emphasized the theme of gradualism, indicating that they will proceed with caution and adjust the pace of tightening in accordance with incoming data.
  • The growth backdrop in North America shows encouraging signs of reacceleration, led by the optimism on the state of the US economy. We are reiterating our call for stronger growth over the next 12-18 months, which supports our preference for equities over fixed income.

Scott Colbourne, Co-CIO & Senior Portfolio Manager, Sprott Asset Management 

  • Over the last six months, most of the tension in the markets has centered on the unpredictable nature of China’s economic and FX policies and commodities.
  • The credit markets have been reacting to these stresses for some time, along with uncertainty over a Fed rate hike and the absence of deep liquid markets at the end of the year. High yield lost 7.5% in the second half of 2015. Despite the turmoil, credit markets have been relatively steady to start 2016.
  • The FOMC minutes released on January 6, 2016 suggest a committee that has reservations about downside risks to inflation and will likely go slowly on an increase in interest rates.
  • High yield has become attractive from a longer term perspective, however, a higher than normal risk premium is warranted given the market uncertainty.

Brandon Osten, CEO, Venator Capital Management 

  • Economic growth in North America is not going well.
  • The Fed rate rise has caused the corporate bond market to falter and earnings could come down when levered businesses are forced to refinance at higher rates. We do not expect a flood of bankruptcies (outside of the energy sector) but this is not good for the overall health of North American corporations in general.
  • We still do not like the oil space and we expect either more pain or time-based frustration in the metals complex – we are staying away for now.
  • Canada:
    • The Federal Government has abandoned its modest deficit projections and has realized that tax hikes on the top earners is not going to make up for the tax leakage from middle class tax cuts.
    • Alberta is hurting badly from the decline in energy prices.
    • Ontario’s debt has gone from $132 billion to nearly $300 billion under the current 12-year Liberal dynasty, while Quebec is not faring much better at $280 billion
    • Unless energy rebounds (which we do not see happening in the next 12 months), the currency markets’ outlook for Canada is not good

Paul Wong, Senior Portfolio Manager, Sprott Asset Management

On gold, historically major lows in gold appear to be accompanied by three events: 

  • A capitulation selling event
    • I believe we have seen this in July – August 2015. Historically, this happens first. 
  • Major currency instability
    • We are almost there. Watch the Japanese Yen; it is on the verge of a major top. The weakening Chinese Yuan is a major threat. Charts of the Russian Ruble, Brazilian Real and almost any EM currency are not looking good. 
  • Real rates fall sharply or go negative
    • The setup for this is becoming more plausible. If everything goes badly, it is not out of the question that the Fed puts its rate hikes on hold (or reverses if it really goes bad). If that were to happen, the probability of a bull run in gold equities would almost be certain.

In these volatile markets, it is important to review your holdings with your SprottWealth advisor to best position your portfolio for success.