TopPicks from Darren Sissons, vice-president and partner, Campbell, Lee & Ross
FOCUS: Global and technology stocks Investors continue to operate in a tactical market, which requires active management. A well-managed buy-and-hold portfolio methodology is a proven value-creating strategy longer term. However, that strategy is not optimal during periods of heightened and sustained market volatility. A better approach is a modified buy-and-hold strategy that includes opportunistic trading.
Rising interest rates and the conclusion of quantitative easing are the driving forces of heightened market volatility. Investors are now re-evaluating exposures while transitioning out of growth into safer defensive sectors and are increasing exposure to fixed income. The natural consequence of rising volatility is securities have a tendency to overshoot the price range justified by underlying fundamentals.
Given the tactical market backdrop, the first half of 2023 is likely to experience continued market volatility. Inflation is driving costs higher. Currency, for U.S. companies in particular and Canadian companies to a lesser degree, is a major headwind. Rising interest rates are raising the cost of both consumption and investment. Collectively, these headwinds will gradually drive earnings compression in the first through third quarters of 2023 and will likely drive continued market downside.
Looking forward, positioning for a tactical market buffeted by high volatility, raising interest rates and inflation requires adequate exposure to commodities, which benefit from inflation. Staples and pharmaceuticals with their defensive business models and rising dividends are also excellent sources of alpha. Once interest rates settle and charges relating to defaults moderate, financials exposure is a must. REITs round out the allocation required for the current market dynamic.
Given the above and as mentioned in prior appearances, investors should revisit their risk management protocols and refine them where necessary. Prune poorly performing investments, consider taking profits on successful investments and raise cash. Investors should recognize risks are high and position accordingly. However, they should also be mindful that market sell-offs create excellent entry levels to lock-in long term core holdings at attractive prices.
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