stock-market-dynamics

There’s nary a bull or bear to be seen on Bay Street these days. That’s because we’re in a sideways market. That was the message Kim Shannon, president and chief investment officer of Sionna Investment Managers, presented at the firm’s Financial Market Review in Toronto yesterday.

It’s a challenging environment but there are still some opportunities, she said, adding that investors need to be “cautious and take the path of low-cost investments and take advantage of bargains in the energy space.”

In the fixed income space, bond yields have been low and, in January of this year, hit lowest they’ve been (at 1.79%). Shannon said this leaves investors wondering if that’s the lowest they’ll go and if the fixed income market will rally.

As for equities, these are still the best option for generous returns, she said. “It is your best solution for getting decent returns going forward.”

Small cap
While equities are an option for returns, large caps aren’t the only option. Teresa Lee, portfolio manager and managing director, investments, with Sionna, explained why investors should consider small cap stock, beginning with a debunking of three myths about small caps.

Myth 1: Small caps are lower-quality business.
Small cap companies have a better balance sheet with similar levels of profitability to large caps. For example, according to Sionna’s research, the debt to equity ratio for its small cap fund is 0.6, compared with 1.1 for large cap.

Myth 2: Small cap stocks are economically sensitive.
Although small caps perform similarly to large caps during a recession, historical data have shown that after a recession they tend to outperform. According to research from BMO showing the average performance of small cap stocks during recessions from 1970 to the present, small caps outperform 15%, on average, coming out of a recession. “You can buy a better-quality business in the small cap market,” Lee said.

Myth 3: Small caps are riskier.
While Lee admitted that small caps are riskier, she said the “small cap volatility and risk can be reduced with research and active management. If you want higher returns, you have to take on more risk.”

She concluded with a simple message: “Small is beautiful.”

Click through to read about Sionna’s “love affair with dividends“…

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