The year is half over and investors don?t have much to show for it: A TSX loss of nearly 4%, the Canadian market is underperforming the U.S. and just about everything else, and there?s a market backdrop where all the rules for Canadian investors seemed to have changed overnight.
What?s new? Plenty and it?s not good.
Golds, which every Canadian has loved for 12 years, are dying. Every day, it seems, the sector is taken down another notch, even as they seem ?cheap.? The problem: massive fund redemptions and no buyers in sight.
REITs, which provided stable income and gains to investors for a decade, are now treated like lepers.
And telcos, one of the best places historically for both income and growth, are now dropping like a junior miner?s shares thanks to seemingly random CRTC rules on competition.
Everything is changing, so what sort of themes should you look for in the balance of the year? We?ve outlined five to consider, but keep in mind we are in a rapidly changing landscape. Flexibility might be an investor?s key to surviving what lies ahead.
Interest rates will keep rising, but not as much as you think
The devastation in the REIT and utility sector this past month was brought about by higher interest rates, and, more importantly, the fear of more rate increases to come. Suddenly, fixed-income payouts don?t seem so attractive.
But, seriously, is the economy really fixed? Are we surging so much that interest rates need to move way higher to slow things down? Hardly.
Yes, there is economic improvement, but we are not out of the woods yet. Rates are unlikely to head to 6% from their 2% levels now. Yields of 7% on REITs such as Artis (AX.UN/TSX) will start to look attractive again at some point.
Bonds are? dead
Despite the first theme, it might indeed be over now for the bond market. After years of bubble talk, the bond market may not have popped, but it surely has sprung a leak.
A bond coupon of 2% that is taxed at the highest rate, and then subtract 2% for inflation, means you lose money on your so-called safe investment. Compare that with the 14% market return in the U.S. and you can see why investors are reconsidering ? and selling ? their bonds.
Dividend growth is back
If the economy is going to grow again, investors will want to participate in that growth. Being the nervous nellies that investors are, however, they are still going to want dividends. Any company paying dividends that also has the ability to grow its dividend is going to attract interest.
For example, Alaris Royalty Corp. (AD/TSX) has increased its dividend not once, but twice this year alone. Its stock is up 30% on the year and investors ponied up $92-million for new Alaris shares this week.
Gold shares will bounce
Seriously. We don?t know when it will happen, but many gold companies are trading near their cash values or far below the replacement value of their still-profitable mines.
We?ve talked to many investors this month who are physically sick over the sector?s plunge. Generally, this means the bottom might be close. (Warning: It could still get very ugly before it gets better.)
We think the best buying opportunity will be in the late fall, when year-end tax-loss selling and portfolio position causes even more sector selling.
Takeovers will surge
CML Healthcare Inc. (CLC/TSX) this week received a cash takeover at a 49% premium. It?s likely the first of many deals to come over the balance of the year.
An improving economy, still-cheap money and very low valuations are an ideal combination for takeovers. The prime sectors to look at for deals are industrial, technology and REITs.
Peter Hodson, CFA, is CEO of 5i Research Inc., an independent research network providing conflict-free advice to individual investors (www.5iresearch.ca).
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