McIntyre bullish on equities

Investors seeking capital preservation over growth should rethink that strategy, because opportunities lie elsewhere.

So says Sentry Investments director and CEO Sandy McIntyre, who specializes in equity income investing.

“Investors are prepared to accept no real return on their capital, for the assurance they will receive the nominal value of their capital back in the future. But Greece and Cyprus have taught us that when governments get into financial trouble, they don’t pay off.”

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Speaking in Calgary at an event hosted by SAGE Investment Advisors and Raymond James, McIntyre notes pension funds are underweight equities and overweight fixed income, relative to their exposures over the past 60-odd years; and retail investors have reduced their equity and markedly increased their fixed income weights.

“They are hoping for safety, when really what they need over retirement is income that increases,” he says.

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To find opportunities, he suggests examining what people are actually doing, as opposed to what they’re talking about. To this end, he follows monthly IFIC data, customized to disaggregate segmented flows; Investment Company Institute (weekly) in the U.S.; and well as Federal Reserve Z.1 flow-of-funds data (quarterly) for the U.S. pension system.

In addition, he tracks margin data in the U.S. together with speculative index futures.

“What individuals do is random. What large groups of individuals do forms primary trends,” he says.

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And people are often influenced by the media, where “there is too much noise,” McIntyre says, using Cyprus as an example.

“The problem that Cyprus has is a result of Greece defaulting. It’s a knock-on from the Greek problem; it’s not a new problem in and of itself. Cyprus GDP is immeasurable in the global context — so stuff like that you just ignore.” McIntyre also ignores most economists, he says, “because they don’t give me a lot of value.” For example, since 1971, there have been seven recessions, and the Philadelphia Fed Survey forecasted none.

“The world of economic forecasts is very different from the real economy,” he notes. “You make your best profits when you are buying things from people who don’t understand the value of what they are selling, because they only see the risk. In a panic like Q4 2009, it really didn’t matter what you bought — junk and quality all recovered.”

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By junk, he means such things as concept stocks and companies without cash flow that are dependent on external capital. Most junior tech and resources fall into this category.

By quality, McIntyre means dividend-paying businesses that generate free cash flow from the real economy and protect the integrity of that cash flow through strong balance sheet management. It’s the difference between, for example, Timminco and Procter & Gamble. Timminco failed in the crisis due to lack of capital, while P&G increased its dividend.

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McIntyre has been bullish on stocks since April 2009, and says we’re in a secular bull market.

“The potential for fixed income over the next five-to-10 years would be very heavily weighted to higher yields and lower returns,” he says. His predictions for the stock market over the same period are weighted toward capital appreciation plus dividends.

McIntyre prefers American investments to Canadian. The U.S. is “in an economic recovery, and has global businesses that are industry dominant, at valuations that are better than they’ve been for the majority of my career.”

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Canada is no longer a fast growing economy, he adds, dismissing the oil and gas industry as a last-cycle story. “There is no undersupply today of oil, natural gas, coal, iron ore or copper,” he says. “It’s very difficult to talk about a secular market in those commodities when supply is greater than demand.

“You can get demand that’s sharply higher in future years, but that requires Chinese growth to be something like 10% – and the Chinese don’t want that, because that’s inflationary. The fact that people are still fixed on the commodity story in Canada makes me bullish for other assets.”

This includes corporate bonds and high-quality stocks in emerging markets like Mexico, Brazil, Turkey, Indonesia and China.