Managing a bear market

An 11-year bull market came to an abrupt end last month when markets dove in response to Covid-19. So how can investors adjust their portfolios for a bear market?

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Focus on analyzing company debt, says Amber Sinha, senior portfolio manager for global equities at CIBC Asset Management.

Debt “becomes a problem very quickly in a crisis,” he said in an April 1 interview.

“We are further stress-testing our company balance sheets. It’s one thing to have a good-quality franchise, but it’s another to be able to survive the crisis. And the survivability question becomes very important when you have a lot of debt on the balance sheet.”

As a result, Sinha is “trying to shy away” from companies with high debt, especially ones that might not survive the crisis. He prefers dominant over smaller companies.

“There will be a lot of casualties in this crisis, and those casualties will tend to be the weaker companies, the smaller companies,” said Sinha, who manages the CIBC European Equity Fund and the CIBC Asia Pacific Fund.

“Our economy is kind of designed where the big companies tend to do better than smaller companies over time. So if you stick with dominant franchises, I think that would be a very profitable exercise.”

Further, he looks to companies with a structurally competitive advantage and proven track record.

He noted that because travel, transportation, tourism and leisure “will remain depressed for a while,” he’s managing his exposure to those sectors.

“As much as I like aerospace, for example, you only want to have limited exposure to that part of the market in a given portfolio,” says Sinha.

And while being defensive is important, Sinha is positioning portfolios “correctly for the eventual recovery after the bear market” so that he can “capture some of the upside.”

The TSX/S&P composite index closed its best week in a decade on Thursday, while the S&P 500 had its strongest week since 1974, fuelled by a US$2.3-trillion intervention from the Federal Reserve.

“Not all parts of the economy, not all sectors, will have the same kind of recovery in terms of the scope, size and speed,” Sinha said.

“We want to have exposure to those parts of the market that we think will recover the fastest… and try and shy away from other areas of the market that might take a while to come back.”

Sinha also sees the decline as an opportunity to pick up high-quality stocks.

“We are trying to further high-grade our portfolios and make them even better than they were,” he said.

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