The markets do feel bad, but clients shouldn’t

By Mark Noble | February 1, 2008 | Last updated on February 1, 2008
6 min read

Volatility is a reality of the capital markets, and investors need to accept that bears will eventually follow the bulls. That was the message Manulife Mutual Funds took to over 2,000 advisors across Canada who tuned in to a forum sponsored by the company.

“The market’s volatility can almost make someone feel like they have seasickness. The best way to cure seasickness is to keep your eye on the horizon,” said David Ragan, director and portfolio manager for Mawer Investment Management, which runs Manulife’s World Investment Class Fund. “Don’t bring your emotions into your investment decisions. Don’t let fear and greed run your portfolio. In times like these, fear could end up pulling you out of the market in what could be a great rebound period.”

Ragan was one of four portfolio managers assembled at the forum entitled How to Manoeuvre in Today’s Global Markets, presented live in Toronto and broadcast via satellite to advisors at events across Canada.

Pat McHugh, vice-president for MFC Global Investment Management and the lead manager of the Manulife Canadian Core Fund, said if you look at market conditions now in comparison to recent history, things seem well positioned for a rebound.

“We know that there is going to be a tomorrow, but we also know that rates are short. We know that bonds aren’t offering us a lot,” McHugh said. “We are scared of the marketplace because we don’t know how much more downside there is. Even though the market is off about 15% so far, we still don’t know when the market is going to bottom.”

McHugh said if you look back at the last 10 crashes and corrections, some of history’s most phenomenal returns have been on the upswing, which highlights the need to stay invested.

“For example, in the dot-com crash, we lost 50% of our stock market. It took 39 months to recover that drop; however, the stock market compounded at a 20% rate,” he said. “The people that were invested doubled their money. That’s the message: When the market does recover, it’s incredible.”

Gauging the timing of a recovery is “murky” right now, said Shauna Sexsmith, vice-president and senior portfolio manager for MFC Global, because much of the volatility is related to economic speculation, and economic data has a far longer timeline for the markets. For example, she says the U.S.-based National Bureau of Economic Research didn’t declare a recession in late 2001, until the data to support that assertion was available, which was in 2003.

“There clearly is evidence the U.S. market is slowing down. Fourth-quarter U.S. GDP was at 0.6%, and there are a lot of economists who feel that we are already in a recession in the U.S.,” she said. “We are not going to know we are in a recession until we are well into it. What we try to do is use history as a guideline. There have been eight recessions in the last 50 years, and any kind of market sell-off related to a recession usually bottoms at about four to six months prior to the end of the recession.”

Sexsmith feels more confident that we have neared a bottom, particularly in light of recent actions, such as the U.S. Federal Reserve’s recent deep interest cuts.

“With economic stimulus in the U.S. and with two huge rate cuts, we feel more confident that we will see a better economic situation by the end of 2008, so stock markets are going to discount things sooner,” she said.

Keynote speaker Steve Forbes, the president and CEO of Forbes Inc. and the editor-in-chief of Forbes magazine, had a different take on the situation. Forbes thinks the U.S. economy is fine but that the Fed is fuelling volatility in the global markets.

Forbes pointed out the U.S. economy has been growing at a faster rate in nominal terms than emerging giants like China and India. Of course, their growth rate as a percentage of their GDP has been phenomenal, but he believes this is simply because they are working from a smaller base.

Forbes’s problem is with the U.S. Federal Reserve, which he believes has poured too much liquidity into the market since 2004. Inflation, rather than real growth, is causing volatility. For example, he says a good indicator of too much money floating on the market is to look at the relative price increase of commodities. The natural tendency of commodities is to go up and down based on supply and demand, but if they all go up, as the majority have since 2004, that points to inflation.

Oil has increased substantially in price over the past couple of years, but so too has gold, so the amount of oil you can buy for an ounce of gold has not changed as dramatically as the amount of oil you can buy using U.S. dollars.

“The best barometer of what the central banks are actually doing is to simply look at commodity mark-ups,” he said. “At $90 a barrel for oil, probably about $40 of that is inflation.”

Forbes suggests investors ignore the commodity boom right now. He says real supply and demand from emerging markets is at historical highs, but also much of the boom is speculation and inflation.

He also warns investors to be wary of buying and selling during the “sucker’s rallies” of a bear market. Instead, he recommends dollar-cost averaging your investments, and if you are going to make investments based on your gut feeling, do the opposite of what it tells you.

“Everyone says they are a disciplined investor and a long-term investor, and they are as long as the markets are going up,” he said. “The key thing is if you make investments on a monthly basis, you’re going to do just fine. The problem is you sell when you shouldn’t and you buy when you shouldn’t. In short, when you feel good, don’t. If you feel bad, go and invest. That is the way you make money long term.”

It certainly seemed as though the message was well received by advisors attending the Toronto event, who now have to distill what was said for clients.

“I found when they were talking about the volatility, each one of them gave us an answer and said okay, yes, we are in volatility,” says Rebecca Horwood, vice-president and investment advisor with Richardson Financial. “Markets are volatile; they will be for a while, but what is happening now has happened in the past. When the market recovers, it does so exceptionally. So the message is for the clients to hang in there for the long term. You are going to get exceptional returns going forward.”

Neil Bocking, an advisor associated with Manulife Securities, said his clients know to expect volatility, but it’s always nice to have a reassuring message to go back to them with.

“The handholding that we did between 2000 and 2003, it’s here again. They need us again. Although, money managers are probably being a little more open this time with the troubles we are facing,” he says.

Bocking says that fortunately, recent history is on his side, and his clients know to expect volatility.

“The speakers were reminding clients what is happening, using recent history that most of them are familiar with, which is what has happened since 1999,” he says. “How many different drops have there been in the market, and how many times have we recovered? If you look at Y2K and the dot-com bust, if you look at the Enron and Worldcom scandals, if you look at 9/11, the markets have always recovered and gone up.”

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Mark Noble