How to capitalize on market fear

Uncertainty. Volatility. Wait and see. We’ve heard these words over and over from pundits and forecasters.

But there’s opportunity when investors are fearful, as a sold-out crowd at the CFA Society Calgary’s 40th annual forecast dinner was reminded on Thursday.

“The change that’s coming in the U.S. – and we don’t know what that change is – will actually be positive for the U.S., and could possibly spill over to other economies in time,” said panelist Leslie Lundquist, who until her recent retirement was senior vice-president and portfolio manager at Franklin Bissett Investment Management in Calgary.

“When you look at things the new president has said that seem consistent, it appears the U.S. should be in for noticeable economic growth, which we have not had in a long time, and that should get some good results from U.S. companies, at least in the short term. It could be a really strong year in the U.S., if the market likes what it hears.”

Lundquist said the S&P 500 could see a double-digit year, with potential total returns of anywhere from 10% to 20%. The TSX could have a positive year as well, with 7% to 10% growth. She predicted WTI at $55 U.S. a barrel, and natural gas strip at $3.25 U.S./mmbtu.

“The markets will climb a wall of worry. Even if it’s not a smooth ride, ultimately, the U.S. will be fine, and Canada will be fine,” Lundquist said. “And investing, when fear is heightened, usually leads to good long-term returns.”

Read: How asset managers are adapting to fragile bond liquidity

The discussion, moderated by Bloomberg Television Canada anchor Amanda Lang, saw another panel member take a more bearish stance.

“While the base case is fairly stable for growth in the U.S. as well as in Canada, there is a lot of risk […] around the new administration’s policies and how that could impact growth, either positive or negative,” said Beth MacLean, PIMCO executive vice-president and portfolio manager in California. “When you manage the country by Twitter, you’re bound to have volatility.”

Nonetheless, strong U.S. fundamentals could benefit certain industries, she noted, “and a positive U.S. stock market in most cases is good for the Canadian stock market as well.” Additionally, the U.S. bond market is still a safe haven for investments – “it has held out better than some had anticipated.”

MacLean expects that 2017 will see WTI in the low US$50s and natural gas “surprisingly to the upside at $4 [U.S.].” The S&P 500 will be around 2,300, she predicted, and the TSX could reach 15,500.

She likes a flexible core portfolio. “Your baseline should be middle of the road. You want to have liquidity, flexibility and the ability to position for either of these left or right tails unfolding. Leave yourself liquidity to take advantage of any periods of volatility. I think diversity in portfolios is going to be key this year as we address these various risks […] and be nimble.”

Read: Don’t be too bullish on 2017 growth

The evening’s keynote speaker, Peter Zeihan, author of The Absent Super Power: The Shale Revolution and a World Without America, sounded a final note of caution about what the coming year – and decades – could hold.

He said the U.S. shift away from globalization was happening well before Trump arrived on the scene.

“The U.S. has checked out, politically, culturally and strategically,” he said. “All of this was going to happen anyway. Now, it’s happening with some adrenaline. And don’t think that when Trump has gone that it goes back to normal.”

With the U.S. disengaged, “countries will have to start looking out for their own interests,” said Zeihan. “We’re looking at the breakdown of the global order. And if you’re banking on stability, it’s a very bold play.”

Read: The road ahead for globalization