On Thursday February 17, BMO Private Wealth hosted an exclusive webcast featuring Brian Belski, Chief Investment Strategist, BMO Capital Markets, hosted by Sylvain Brisebois, Managing Director, Senior Portfolio Manager, BMO Private Wealth. In their conversation, Brian provided his perspective on the markets, discussed concerns over inflation and rising interest rates and offered insights on how best to approach the months ahead for a financially sound 2022.
Participants:
Sylvain Brisebois, Managing Director, Senior Portfolio Manager, Head National Sales Strategy & Programs, BMO Private Wealth
Brian Belski, Chief Investment Strategist, BMO Capital Markets
Reality Check
While it’s easy to get caught up in all the negative messaging around Canada’s weak market, the reality is more optimistic, offered Brian Belski in his opening remarks. Investment Strategist at BMO Capital Markets, Belski said that if you look beyond the rhetoric, you’ll find that Canada is experiencing a strong stock market performance, especially this past January.
“Canada is one of the best developed markets in the world,” he stated, adding that the country remains a very underappreciated asset. It shouldn’t be surprising, moreover, that Belski is predicting strong targets for both the U.S. and Canada. “I believe they have the best companies in the world.”
Belski is concerned that the investing public is being driven by rhetoric and fear, adding that the fear of being wrong holds people back. “Instead of going forward, skating to where the puck is going, we’re busy stick-handling.” Investing, like life itself, requires more than an academic outlook, said Belski, explaining that his philosophy – one partially borne of a chance meeting with renowned American investor Peter Lynch – is based in common sense. In other words, just because interest rates rose after a difficult period in the past doesn’t mean the same result is destined to repeat itself.
Balanced Look at Inflation
For those who believe we’re going to repeat the events of the1980s, with its high interest rates and high unemployment, keep in mind there are few parallels between then and now, argued Belski. There’s no doubt we’re dealing with inflation – and probably will for some time – but what’s happening today is very different from past inflationary periods.
It’s important to remember that inflation typically occurs as a response to over/under capacity or supply-demand disruption. The pandemic certainly saw massive supply demand disruption but there’s no reason why we can’t open up just as fast as we shut down, said Belski. “In fact, data and indicators demonstrate that there’s a good chance we’re in the process of peaking,” he added, pointing to the strong demand and increase in purchases of goods and services.
“We believe inflation can drop off a lot of faster toward the second half of year,” Belski then predicted. “We will have three interest rate increases maybe four,” he added, admitting that several banks are predicting seven-rate increases.
Geopolitical Concerns
Developing strategies around geopolitical events is a dangerous game, said Belski. That said, he believes the situation with Russa and Ukraine will follow a similar pattern as previous geopolitical events, which tended to see a quick response. “That’s why we think on a short-term basis.” Since the U.S. increased rates quickly (and the Bank of Canada typically follows suit), we will see a period with lots of volatility, higher bonds and lower stock prices before rates will decrease again.
Lessons from COVID
North Americans coped well with COVID because we have the best companies in the world, Belski stated. It will take a long time to transition to normalcy, but the pandemic has only reinforced a strong focus on quality at BMO, Belski said, explaining they continue to search for companies with steady earning streams, strong balance sheets, little debt and that can potentially pay a dividend.
In 2017-2018, the U.S. Federal Reserve raised rates and growth started to slow before they reversed course quicky in January 2019. Given the aggressiveness of the Feds this time around, we will see more of a normalized transition to higher rates, offered Belski. We’re at exceptionally low emergency levels so, even if we get to 1.25/1.50 basis points, it will remain very low, and it will be some time before we see average numbers.
Keep in mind that the Feds raise rates when the economy improves. So, it’s actually a good thing that rates are going up; it means we’re beginning to witness normalcy in the market. Now more than ever it’s important to pursue common-sense discipline and processes when managing your money.
Outlook on Housing, Utilities and Telecom
Canada is still seeing very strong gains in housing, due mostly to supply, not demand, Belski said. “Even if rates go up, I don’t think the housing issue is as dire as people feel,” he argued, comparing the numbers to those in the U.S where there’s more space for homes. “I’m not worried about the housing market at all.”
In a rising rate environment, Belski believes it’s important to focus on REITs, utilities and telecom. In Canada, telecoms are one of the best buys. Meanwhile, utility input costs are going up dramatically due to the challenge with oil, but the good news is REITs usually do better than utilities in a rising-rate environment. Tech REITs are great areas to look. And, with consumers starting to shop more, consumer and apartment REIT business are strong too.
Financials and Other Winners
“We love Financials,” Belski stated emphatically. There’s fear in the marketplace that banks have over-reserved due to the energy issue. But they had a massive rebound in terms of performance. Canadian banks are excellent stewards of capital, he adds, especially those looking to grow in the U.S.
As for tech, in 2000, eight percent of technology companies in the U.S. paid dividends; today 70 percent do. Amazon, meanwhile, is a likely candidate for a dividend, though they don’t have one now. Microsoft and Apple are part of BMO’s dividend growth portfolio, with Apple one of the best companies in the world, especially after its strong leadership during the pandemic.
Then there’s Costco, a top 25 company in the world, which did a great job with inventory management and pivoting online during COVID. “It goes back to the notion of ‘you get what you pay for’,” said Belski. “It’s the best company in that space, and that’s what you want to buy.”
When asked about electric cars, specifically Tesla, Belski praised the company’s brilliant marketing and being first to market. But he’s unsure of what the future holds for Tesla and whether it will be the best product out there. What Belski is certain about is the importance of focusing on the nuts and bolts when it comes to electric cars. For example, copper is essential to batteries, integrated circuits (and companies like NVIDIA) are important too. Essentially, advises Belski, if you can’t buy a company that represents a product, invest in the bits and pieces that go inside it.
Assessing ESGs and Alternatives
The focus on ESGs – Environmental, Social, and Governance – is a positive development but it remains to be seen whether the metric should be a long-term strategy when building one’s portfolio, offered Belski. To be sure, BMO insists on owning companies that are good citizens (there’s no interest in Chinese companies or Emerging Markets as they’re not governed by BMO principles) and Belski believes that investment choices should align with one’s values.
“I think we could have a good year in gold this year,” Belski then predicted. Cryptocurrencies, on the other hand, are less reliable. Remember that 2020 was a great year for gold but not for crypto. “I don’t believe it’s an asset; it’s a trading instrument.” And let’s not forget performance. While markets have been down, crypto has been down too, by 5.5 percent. Gold, however, is up. That’s the better alternative, Belski concluded.
Top Sectors in 2022
As for his favourite sectors for the year, Belski was clear: Financials, Consumer Discretionary and Industrial. “I still think that tech is the premiere innovation, it’s in everything,” said Belski, explaining that a vaccine would have been impossible without it, as would utilities, REITs etc.
Financials have a strong value proposition and work well. And, with consumers returning, Consumer Discretionary is an obvious choice. As for Industrials, as we unwind supply issues and build things back, they will be well-positioned to make a difference, he added.
And let’s not forget the rails. BMO owns all three in Canada, but their importance will only grow as we re-assess production in North America. The pandemic taught us that we don’t need all the widgets traditionally produced overseas and shipped our way. We can make less widgets closer to home and ship them via rail, significantly reducing supply issues moving forward.
Belski left the webinar with a strong message: “If you’re expecting it, looking for it, it rarely happens.” Referencing the premise of The Art of Contrary Thinking – what he calls one of the best investing books – Belski cautioned every investor to stick with what you know. “If you have the analysis to back it up, always go the other way,” he said, adding that people are too one-sided and the marketplace has felt the effect. “I think the second half of this year will be one for the record books. And I don’t think people are positioned for it.”
You can watch the full discussion here: https://www.odysseyproduction.ca/live/bmooutlook0222/
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