I had the opportunity last night to attend a dinner and talk in Montreal with Myles Zyblock, Chief Investment Strategist for Dynamic Funds and David Fingold, manager of several of my favourite Dynamic global funds. As an aside, the dinner was excellent; Europea was the restaurant; the service was top-notch, and the chef created many whimsical appetizers and dessert bites which were presented with great artistry and showmanship. In the informal presentation and discussions that followed, I gained some insights into their ideas about the global risks and opportunities facing investors today. My most important take-aways:
- The huge growth in China and other emerging markets from manufacturing and infrastructure spending is slowing and will continue to slow in coming years. Emerging markets debt poses a little-known risk for investors as some of the world’s fastest growing countries shift their economies towards greater domestic consumption as a share of GDP. When Japan and South Korea did this, the result was ten to fifteen years of declines and stagnation in their markets.
- The assets that investors are buying today for safety have much greater risk than they think. These include bonds, high-quality high pay-out stocks with little growth, as well as many REITs, utilities and defensive stocks.
- The 20% of fund managers who have High ActiveShare ratings deliver better returns than their benchmarks (see my earlier blog on this subject) but the vast majority of investor assets are managed by the 50% of managers who are closet indexers, or the 30% of managers whose portfolios look somewhat like the index.
- Canada’s market performance is likely to be underwhelming for the next few years. Canada tends to outperform global markets when commodities are rising rapidly but it’s not likely that there will be another ten-fold jump in the price of oil and dramatic increases in gold and commodities anytime soon.
- The best opportunities for investors today are in U.S. industrials, select European banks and carefully selected Spanish, French, Italian and Greek companies. U.S. industrials will benefit from rising capital expenditures to replace equipment that is older than at any time in the last 60 years and from low natural gas prices as North America moves to energy self-sufficiency. European banks and stocks in the weakest Euro economies are priced for continued recession, and modest growth or even less-bad economic performance will produce dramatic gains in many of these stocks.
Disclaimer: It goes without saying (but I’ll say it anyway) that these ideas are not intended as advice on any specific investment or strategy. Investors should consult their financial professionals before making any investment decisions.