For mutual fund holders, the statements as of June 30 must have had the effect of a cold shower. Both equity funds and several fixed income funds posted losses of 10% to 20% during the first six months of the year.
Posted yesterday at 7:00 am
Buoyed by fairly good corporate quarterly results, the markets provided a nice rally over the next month and a half, allowing investors to recoup about half of their losses. But the recovery was short-lived and the fall in the markets seems to want to make investors dizzy again. Stock markets have resumed a downward move and bond markets appear to be in free fall.
What can be done ? The old adage says that it is time to buy when the markets are depressed. Would we be in this situation?
Now is the time to be cautious, Philippe Côté, portfolio manager, Eterna Groupe Financier, is quick to say. First, because it is usually impossible to determine what the bottom of the markets will be. Interest rate hikes are not over, if we are to believe the words of central bankers who are more determined than ever to curb inflation. As it takes 18-24 months before the effect of rate hikes is really felt, there seems to be no urgency to want to take advantage of bargains, the manager believes. Instead, he suggests that investors gradually use their cash during market declines to build up their positions.
But also, I really don’t advise selling certain positions right now to buy them back later at a better price. Stock indices are down 18% in the US and 13% in Canada this year.
There is no assurance that we are near the bottom, and it would be dangerous to sell now, as the markets have already depreciated a lot and there is no assurance that we can buy much lower.
Philippe Côté, Portfolio Manager, Eterna Financial Group
Eterna’s manager feels an economic slowdown is underway, but doesn’t think a recession is in the cards. “As we get closer to 2023, more attractive prospects should appear, when inflation should, at a minimum, stop rising,” he believes. But the watchword for the moment, however, remains precaution, according to him.
Several major obstacles
The market’s weakness stems from the fact that they face various problems, explains Guy Côté, portfolio manager at National Bank Financial. First, the geopolitical situation was certainly a very negative element. The Russian attack in Ukraine has huge consequences for the energy sector and has sent oil and natural gas prices skyrocketing. It came to exacerbate an inflation that we were already losing control of, as a result of liquidity injections by governments to prevent the world economy from entering a recession after the closures caused by the pandemic.
Inflation is inexorably reflected in increases in interest rates, recalls Guy Côté. For this reason, the central banks had been somewhat slow in starting the rate hike cycle, believing that this inflation would only be temporary. But now these central bankers have decided to make up for lost time by increasing the magnitude of the latest rate hikes. And they announce that it is not finished.
To determine when we can return to the market with confidence, signs must appear that inflation has been defeated, Guy Côté believes. And the indicator will be the 10-year US government bond rate. The yield on these securities, which was less than 1% last fall, jumped to more than 3.5% recently.
Until we see a decline in the 10-year US government bond yield, it is hard to believe that we can see an upward rally in equity markets.
Guy Côté, portfolio manager at National Bank Financial
If the effects of the current situation in the financial markets have made us realize anything, it is that bonds are no longer the element that was said to be safe in a portfolio, explains Daniel Lanteigne, Senior Partner, Reverber Integrated Financial Strategies. Since bond prices move inversely to interest rates, interest rates have fallen considerably over the past 10 to 12 months, with value losses greater the longer the bond matured.
“This implies that we will have to seriously reflect on the place of bonds in the portfolios of individuals and that new alternative solutions will have to be developed”, says Daniel Lanteigne. And the mutual fund industry can certainly help, he says.
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