Mike Philbrick, chief executive officer, Resolve Asset Management

FOCUS: Exchange-traded funds

MARKET OUTLOOK:

Inflation Shock to Growth Shock Continues

Recessionary concerns intensified in the wake of weak second-quarter GDP figures for the U.S. and Chinese economies, in addition to an array of negative indicators and a looming energy crisis in Germany and other European states. Sovereign yield curves – including U.S. treasuries, U.K. gilts and German Bunds – inverted and global equities rallied as markets began to price in the possibility of (yet another) U.S. Federal Reserve pivot and an interruption of monetary tightening.

Remember, bear market rallies tend to be violent, patience and risk management are warranted at this time. The stock markets remain vulnerable to weaker than expected economic sentiment, outcomes and elevated stagflation risks. For example, the International Monetary Fund has slashed its global growth forecasts and raised its projections for inflation, warning that the risks to the economic outlook are “overwhelmingly tilted to the downside.” This puts the “soft landing” narrative on uncertain footing in our view.

Looking forward, economic regimes that are predisposed to higher inflation volatility and lower economic growth are vulnerable to increased volatility due to these uncertainties. These regimes are also more difficult for policymakers to achieve stated inflation or growth targets.

If investors are to succeed in the current economic regime, today’s portfolios must be prepared to weather periods of poor global growth, that are accompanied by large swings in inflation and tightening financial conditions. This means that maximizing the opportunity for true diversification and actively managing portfolio risk is going to be central to investor success over the coming decade.

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TOP PICKS:

The BMO Equal Weight Utilities Index ETF (ZUT TSX)

This has been designed to replicate, to the extent possible, the performance of the Solactive Equal Weight Canada Utilities Index net of expenses. Designed to provide exposure to Canadian utility stocks in an equal-weighted exposure to lessen security-specific risk.

 “With low-demand elasticity and reliable revenue streams, utility companies can afford to pay consistent and relatively high dividends to their shareholders. For this reason, many utility stocks are almost treated like bonds by income investors who rely on their holdings for revenue,” according to Investopedia.

The iShares Gold Bullion ETF (CGL.C TSX)

This ETF seeks to replicate the performance of the price of physical gold bullion, less the fund’s fees and expenses. The exposure to the price of gold is unhedged to the Canadian dollar. Gold as an asset class can be used to help diversify your portfolio and help protect against inflation and deflation in low-growth environments.

The Horizons S&P/TSX Capped Energy Index ETF (HXE TSX)

This provides exposure to the performance of the S&P/TSX Capped Energy Index (total return). The S&P/TSX Capped Energy Index (total return) is designed to measure the performance of Canadian energy sector equity securities included in the S&P/TSX Composite Index. This structure typically reduces tracking errors associated with replicating an index and increases tax efficiency as well as having a lower MER than competitor ETFs. Global supply and demand dynamics remain positive for oil and gas given the situation in Ukraine and Russia and the under-investment in the sector over the last decade due to ESG mandates. Investors still have to keep in mind the above-average volatility that the sector has when considering positions. It’s unlikely to be a smooth ride but the current pullback is worth consideration for adding to or starting positions. 

PAST PICKS: October 1, 2021

The Horizons Global Uranium Index ETF (HURA TSX)

• Then: $23.53
• Now: $22.00
• Return: -7%
• Total Return: -5%

iShares MSCI Saudi Arabia ETF (KSA NYSE)

• Then: $41.97
• Now: $45.52
• Return: 8%
• Total Return: 10%

The 3iQ CoinShares Ether ETF (ETHQ TSX)  

• Then: $17.04
• Now: $9.93
• Return: -42%
• Total Return: -42%

Total Return Average: -12%