Markets are more volatile these days for several reasons, says David Picton, CEO and portfolio manager of Canadian equities at Picton Mahoney Asset Management. He’s one of three managers of the Renaissance Canadian Growth Fund.
Three of the main reasons are:
1. The end of QE in the U.S. “The last two times this occurred, there was more volatility,” says Picton. “[If] you take the training wheels [off] the market, it has to act on its own for a little while. So it’s natural to expect some volatility.” Read: Fed may hike rates by mid-2015
2. Leverage ratios have increased. Due to long-term stability, there’s excess investment in some areas of the market, he adds. Now, Picton suggests the market needs to shake some of that overcrowding out and, as such, “you’re getting the first hints of volatility,” which was more extreme around mid-October. Read: Help clients adopt long-term outlooks
3. Declining inflation expectations in Europe. “We thought there would be some stability and some increase in inflation expectations, and the opposite has occurred,” he adds. “It may now be a case where the market has to apply pressure to European policy makers” so they embrace policies similar to those the U.S. adopted between 2009 and 2012. Read: Greece elects anti-austerity party
Once markets stabilize, Picton says interest rates have to rise. They have been too low and “below normalized levels,” he explains, “and the returns in the bond market have been too strong.” And now, “we have a new bout of inflationary pressures.”
As rates climb, he plans to shift his portfolio away from a focus on economic expansion and cyclicality. “We had been adding to energy and materials positions, [so] we’ve been moving some of that weighting down to focus more on stable growth.”
A look at Canada
In Canada, the weakening loonie has been a sign of rough waters, says Picton.
In late 2014, the currency’s low value was “helping offset the decline in oil prices,” but oil prices since dipped much further. Also, the BoC’s latest interest rate announcement weighed heavily on the Canadian dollar.
Picton suggests the viewpoint on the impact of the weak loonie depends on the sector you’re looking at. “As an Ontario resident, [you] want a lower Canadian dollar. We need our manufacturing sector to be more competitive and, from that perspective, a lower dollar does help improve [the province’s] relative attractiveness.”