Finding opportunities ahead, recession dread and turning wisdom on its head

Good morning. We’ve just about survived 2022 despite a year-long market rout, elevated inflation that continues to stick despite central bankers’ best efforts to tame it, and Russia’s war on Ukraine that has helped fuel the above and unnecessarily killed thousands of people for no good reason. Next year can’t be worse, can it? Hopefully not, but it’s probably a good idea to prepare for more volatility and a possible recession since that’s what many analysts and economists are calling for while you’re looking for opportunities.

The S&P 500 has moved at least one per cent — either up or down — on about half the trading days since the start of the year. Along the way, there have been many short-term rallies of five per cent or more and a few of 10 per cent or more. Yet the index is still down about 19 per cent on the year and each major rally has been followed by a new low for the year, bottoming out so far at 3,577 on Oct. 12. But Deutsche Bank AG’s chief U.S. equity and global strategist Binky Chadha is calling for the index to drop to 3,250 around mid-2023.

The S&P/TSX composite has performed much better — down only 6.3 per cent on the year — and it’s been less volatile, primarily due to energy companies that have been returning more and more profits to shareholders through increased dividends and share buybacks, though the latter might become more muted as the federal government starts taxing them. 

Nevertheless, there have been plenty of ups and downs on all the major indexes, so much so that IG Wealth Management’s outlook theme is peaks and troughs. “Overall, however, we believe there is much less downside for equity markets in 2023 than what investors experienced in 2022,” it says, adding that U.S. equities will still face some headwinds given their elevated valuations. “We see a significant valuation gap to the S&P 500 index that may favour a tilt away from U.S. equities towards international, emerging-market and Canadian equities.”

Score one for Canada then. The S&P 500’s forward P/E is within 10 per cent of its long-term average, but the valuation gap between that index and the S&P/TSX composite is still at 5x when 2x-2.5x is more typical, says CIBC Capital Markets in its 2023 Equity Outlook. “As such, we still expect Canadian equities to outperform,” it says. “S&P/TSX equities are already well below their longer-term average P/E, and dividend yields are attractive (and buyback activity will continue).” CIBC particularly likes energy, utilities and telecom.

Canada 2 U.S. 0.

It’s not all bad for the U.S. Tony Genua, senior vice-president and portfolio manager at AGF Investments Inc., points out that U.S. equities tend not to post two bad years in a row, though the Nifty Fifty in the 1970s and the tech bubble of the 2000s are notable exceptions. “The most common outcome has been returns in the 10-to-20-per-cent range in the year following one that saw negative returns,” he says. “Historically, investing in stocks after a 20 per cent decline has tended to yield good outcomes for investors.”

We’ll call that a draw then. You can call institutional investors’ outlook on equities a draw, too, given that 51 per cent of them are bullish on stocks for 2023 despite the expected volatility, according to the 2023 Natixis Outlook Survey. “With so much downside having been priced in over the course of 2022, it’s likely investors are looking ahead to recovery since the bulk of the damage has already been done.” Slightly more of them (56 per cent) are bullish on bonds while 63 per cent are most bullish on private equity, but 82 per cent believe cryptocurrency will continue to underperform, so hopefully you don’t have any money with the other 18 per cent.

Need more forward thinking? Keep an eye out for our annual Investing Outlook package rolling out online during the last week of December and in print on Dec. 31. A few of our regular columnists will be contributing as well as a couple of guests to help you prepare your portfolio for the coming year.

Andy Holloway, editor of the FPI and Financial Post Magazine, and senior features editor of the Financial Post. If you have any quips, queries or comments, get in touch at [email protected].

5 radical investing views and whether you should take advantage of them

Investors who go against the grain can sometimes make a fortune if they are right. Think Warren Buffett stepping in to support financial companies when the world was imploding in 2008. There’s no shortage of seemingly outrageous calls these days, so veteran investor Peter Hodson considers five of them, from US$1-million bitcoin to nuclear fusion eliminating fossil fuels.

SUSPEND YOUR DISBELIEF

Storm only just beginning in the real estate investment market and two other trouble spots

Ideally, investors should always flush out risks and factor them into their investment decision-making process, though year-end is a natural time to do so. Portfolio manager Martin Pelletier says looking at things from a risk-per-unit-of-return basis has served him well, so with that mind he shares three areas you may want to keep a very close eye on, and he offers some alternatives he thinks are much better.

FOREWARNED IS FOREARMED

Energy could be the hedge of a decade for investors as inflation stays high

Oil prices are dropping, but the energy sector, especially oil and gas, has not had sufficient capital investment for the past decade, which should help prices rebound. Wealth management adviser Arthur Salzer says the tight supply of oil, and associated refined products, will likely continue (with ebbs and flows) for the next three to seven years, which translates into higher energy and food prices, and, therefore, inflationary pressures that can’t be solved by merely increasing interest rates.

GAINING ENERGY

Shorts eye more gains after reaping US$50 billion from Big Tech in 2022

Short sellers have enjoyed massive gains by betting against the biggest technology companies, and some bears see further profits in 2023 because many of those stocks are still expensive relative to their estimated sales or earnings. “The reason we are so attracted to the technology sector is because there are still a ridiculous amount of companies out there that are trading at 10, 15, 20 times price to sales,” says fund manager Brad Lamensdorf.

BIG PROFITS FOR SHORTS

FP 500 — The most authoritative survey of corporate Canada: The 2022 FP 500 is the only national ranking of the country’s public, private and Crown corporations, making it an indispensable research tool with vital data on Canada’s top companies across all sectors. Order your copy here.

A recession is coming to Canada in 2023 amid huge debt, housing bubble

There’s trouble brewing in the Canadian economy. For one thing, economist David Rosenberg says this year’s surge in interest rates on debt-heavy household balance sheets will hurt domestic demand. For another, the entire debt-servicing burden today is already higher than it was in 1981-82 when mortgage rates topped 20 per cent. The good side of all this debt and the popping housing bubble: the Bank of Canada will be forced to cut rates to combat the resulting recession and ensuing deflation.

A HARD RAIN’S A-GONNA FALL

Yes, you can now commit fraud in “t-shirts and shorts in the sun,” as Damian Williams, attorney for the Southern District of New York, recently said when talking about the alleged offences by FTX founder Sam Bankman-Fried. But John Ray, FTX’s new court-appointed chief executive, had a more concise way of summing up the allegations (which haven’t been proven). “This isn’t sophisticated whatsoever,” he said. “This is just plain old embezzlement. Old school.”

Should I hold onto my large portfolio of preferred shares or diversify?

Some investors like preferred shares because they are hybrid securities in that they are equity investments that pay a fixed dividend. Sounds simple enough, but certified financial planner Allan Norman says they are complicated investments, so he walks us through the pros and cons of buying them or, in the case of one reader, hanging onto them.

GET THE ANSWER

Got an investing or personal finance question? Hit us up at [email protected].

Canada’s national net worth declined $500 billion, or 3.3 per cent, to $17.1 trillion, with more than half of that drop recorded in real estate, according to Statistics Canada’s latest tally of assets and liabilities. That’s the biggest decline since the fourth quarter of 2008, when a wave of bank failures in the United States and Europe triggered the global financial crisis. Financial Post editor-in-chief Kevin Carmichael says the silver lining is that there’s evidence households and companies are getting ready for what many are saying is an inevitable recession.

Five ways to take advantage of tax benefits when donating to charity

Canadians continue to donate to charitable organizations despite rising prices eating into their disposable income, but that’s not what surprises tax expert Jamie Golombek. A recent survey found that only 42 per cent of those who donate have a strong understanding of the associated tax benefits even though 51 per cent said the ability to receive a tax credit increases the likelihood they will donate. With year-end fast approaching, he offers some things to remember as you consider donating.

‘TIS THE SEASON TO GIVE AND RECEIVE

Household makeover: a financial success story to show how you can live within your means

Struggling to make ends meet, Bob and Susie’s health and relationship were deteriorating as they fell further and further behind on their minimum debt payments and ran short of money to cover basic necessities such as food and utility bills. But debt counsellor Sandra Fry says this potentially gloomy story has a happy ending since the couple managed to stop their freefall. Here’s how they did it and you can, too.

THE FIX IS IN

The prime rate at the big banks is continuing its upward trajectory, rising to 6.45 per cent from 5.95 per cent after the Bank of Canada on Dec. 7 raised its benchmark rate to 4.25 per cent. As a result, mortgage broker Leah Zlatkin tells the Financial Post’s Larysa Harapyn that she is seeing fewer purchases, more refinancings and “some defaults starting to hit the market and we are starting to see some power of sales in the marketplace in the (Greater Toronto Area).”

WATCH THE VIDEO

Good news if you’re tired of inflation: Aren’t we all? The core consumer price index (excluding food and energy) in the United States grew just 0.2 per cent in November from the previous month, the lowest increase in more than a year, and six per cent from a year ago. Stock markets rejoiced very briefly on Tuesday following that news before ending the day flat and then cratering when the United States Federal Reserve indicated it had no plans to stop hiking rates.

Bad news if you’re a Shopify Inc. shareholder: The 70 per cent plunge this year by Canada’s most prominent technology company has caused a 978-point drag on the S&P/TSX composite index, almost single handedly dragging the index into the red. The good news is that the composite is still one of the better-performing indexes this year.

Good news if you want changes at First Capital Real Estate Investment Trust: Activist investor Sandpiper Group Holdings Inc. is joining Ewing Morris & Co. in seeking changes at the Canadian REIT, whose shares have fallen as much as 24.5 per cent this year, but have been rallying more recently.

Bad news if you’re a cryptocurrency fan: If you are, you’re likely rushing to get any money you have left out of crypto funds and exchanges. Investors are pulling out record levels of bitcoin as the collapse of Sam Bankman-Fried’s FTX stirs fears over the safety of their assets.

Good news if you invest in groceries (but don’t buy them): Sobeys’ parent company Empire Co. Ltd. boosted its profit by 8.3 per cent to $189 million on sales of $7.6 billion in its second quarter despite a cyberattack that snarled operations for a week in November.

Bad news for oil investors: Crude remains on track for its first back-to-back quarterly decline since mid-2019 as the demand outlook sours due to global downturn concerns and thin liquidity exacerbates price swings into the year-end.

Good news if you’re into hospitality: “The recovery in travel, already very real in the third quarter, accelerated in the fourth,” says Transat AT Inc. chief executive Annick Guérard. The leisure airline, in reporting record revenue of $573.1 million in its fourth quarter, and a net loss of $126.2 million, says load factors for winter 2023 are now comparable to 2019 levels.

Bad news if you’re a Tesla Inc. investor: The electric-vehicle maker’s shares are trading at their cheapest-ever multiple after losing 50 per cent of their power this year, and some say the world’s most valuable automaker should see more declines given Elon Musk’s lack of attention and China’s stuttering growth. It doesn’t help that Musk has dumped about US$40-billion worth of shares over the past year or so.

Email us at [email protected]

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