Market commentary
I know many of you are spending these beautiful summer days on the golf course. So, with the help of our resident golf pro (Victor), I’m going to attempt a golf analogy to explain today’s market and our portfolio positioning.
Most people understand that stocks (public equities) are amongst the highest returning investment over the long-term. However, a critical condition to earning high returns in stocks has to do with your entry point, or the price you pay for them. Despite a high-risk profile, stocks don’t always produce high returns (if only it were so simple), even over periods as long as a decade. As highlighted in our June Memo, at current valuations, the historical 10-year return from stocks has been zero or less. Now here’s my feeble attempt at a golf analogy.
The driver is typically the club that hits the ball the furthest (i.e. the club that delivers the highest return). However, it is also the club that tends to get golfers into the worst trouble, most often (i.e. the riskiest club). But – just because you’re on a 500-yard par five, does not mean the driver is the best club for that hole. There may be bunkers, water, a narrow fairway or strong winds that call for a club that can be hit with a higher probability of success, but less distance. The environment and conditions matter a whole lot to club selection. So, just because a driver typically produces the longest shots, it is not always the club that will get you on the green in the fewest strokes.
We believe stocks are like the driver and that right now, we are teeing off on a hole with narrow fairways lined by thick forest, water hazards, bunkers and a strong crosswind. I’m confident that losing your portfolio to a hazard is even worse than duffing a Pro-V1 into the water. That’s why we are gradually shifting portfolios away from the driver and towards our irons for a more reliable path to the green.
www.optimisticallie.com/p/humans-robots
We are seeing stat after stat highlighting the remarkable market and economic concentration and dependence on investment and hopes in artificial intelligence (AI). It is possible AI produces robust productivity growth amongst other economic benefits, however, it seems as though investors are increasingly “all-in” on this narrative. Participation in this “revolution” is critical as an investor, but caution is warranted.
Portfolio strategy
Debt
Liquid fixed income
- Credit spreads remain very tight, meaning riskier corporate bonds appear expensive with little margin of safety and relatively low expected returns.
- Our fixed income portfolios remain defensive, meaning shorter maturity, higher quality, more liquid.
- Volatility in government bonds and substantial fiscal policy risk means investors should no longer consider government bonds to be “safe”, they have shown substantial volatility and leave investors exposed to inflation and other risks.
Private credit
- Has provided excellent, consistent returns throughout recent bouts of volatility.
- Rates remain high in the US, preserving healthy yields.
- Europe’s debt market is still heavily bank-financed, a substantial opportunity for private credit investors.
- We remain bullish on private credit and we are pivoting to even higher quality strategies.
Equity
Public equity (stocks)
- Solid Q2 earnings has pushed stocks higher, despite renewed trade tensions.
- Valuations are elevated, particularly in North America.
- Risks abound yet valuations reflect robust growth and stability. Unfortunately, almost all economic and earnings growth is coming from “AI hyperscalers” (mega-cap tech companies). Seems to be a precarious set-up.
- We remain confident in our decision to reduce exposure to the most volatile stocks.
Private equity
- Our ongoing effort to bring the best, institutional-quality private equity to your portfolios is yielding outstanding results. In recent months we have spent considerable time with Apollo Global Management, specifically researching their flagship fund, Apollo Aligned Alternatives. Perhaps the most impressive aspect of this strategy is that Apollo invests its own assets, on a continuous basis, into the same fund. Apollo currently represents about 60 per cent of the total assets. Anytime an investor can align their interests so tightly with a manager, that is a powerful tailwind. The diversification of this portfolio, the impressive capabilities of Apollo and the alignment all lead us to believe this is the best strategy we’ve seen in private markets yet.
Real assets
Real estate
- Certain segments should continue to experience growth; however several factors could weigh on returns more broadly (i.e. building costs, modernization of old buildings, higher financing costs). We have reduced exposure over time in favour of more attractive sectors.
Infrastructure
- Infrastructure tends to offer inflation protection, steady cash flow backed by real assets that are difficult to replicate, have rising demand and investors can earn modest capital appreciation as the replacement costs rise.
- Infrastructure has multiple tailwinds right now (pent up demand, shifting definition of infrastructure to include things like data centers, increased energy demand, lack of public funding to finance projects). The opportunity set in infrastructure has finally opened up to individuals and we intend to capitalize in the coming weeks.
The information contained herein has been provided for information purposes only. The information has been drawn from sources believed to be reliable. The information does not provide financial, legal, tax or investment advice. Particular investment, tax, or trading strategies should be evaluated relative to each individual’s objectives and risk tolerance. This does not constitute a recommendation or solicitation to buy or sell securities of any kind. Market conditions may change which may impact the information contained in this document. Wellington-Altus Private Wealth Inc. (WAPW) does not guarantee the accuracy or completeness of the information contained herein, nor does WAPW assume any liability for any loss that may result from the reliance by any person upon any such information or opinions. Before acting on any of the above, please contact your financial advisor.
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