It’s difficult to know who to believe these days.?For every market guru for example Bill Gross who says financial markets are set for an accident, there are others like David Rosenberg who say there’s you don\’t need to panic.
But as difficult as getting it right may appear at this stage in the cycle, it might be just as vital that you plan on getting it wrong.
\”There are a lot of investors who view investing as black and white, but it’s more often than not shades of grey,\” said Bob Sewell, chief executive of Bellwether Investment Management Inc. in Oakville, Ont. \”It\’s important to have conviction, however, you need to have contingencies.\”
Perhaps the biggest uncertainty facing investors these days is the U.S. Federal Reserve\’s next move ahead interest rates.
BlackRock Investment Institute recently outlined three scenarios that may influence the central bank\’s monetary policy within the next few months and highlighted the likely impact of every on asset prices.
The first scenario is global stagnation, marked through the failure of the European Central Bank and Bank of Japan to bring back their respective economies through quantitative easing.
If this occurs, the Fed would hold off raising rates more than markets currently expect and create a flight to safety that would benefit government bonds although not much else.
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Japan and eurozone stocks would underperform U.S. stocks in this scenario, BlackRock said, while defensive stocks would fare better than pro-growth and rate-sensitive sectors.
The second scenario sees the U.S. recovery staying the program, with the Fed gradually beginning to increase rates later this season as expected.
Global equities would certainly be winners in this instance, with cyclical sectors such as financials outperforming and emerging-market stocks lagging. Government debt could be hit the toughest, but corporate bonds would rally.
Finally, in the event that the U.S. central bank raises rates too quickly in the face of strong U.S. economic data, BlackRock believes there\’s a huge chance of a selloff in both equities and bonds.
Greg Newman, an affiliate portfolio manager at The Newman Group, a Scotia McLeod affiliate in Toronto, has their own thoughts on each scenario.
He recommends having a very high proportion of high-quality bonds plus some \”yield-proxy\” equities for example utilities inside a global stagflation environment, while asset classes that hedge inflation work best for a fast-growing U.S. economy.
\”In the 2nd scenario, almost everything works,\” he explained. \”But the fears of being dragged in to the first or third scenarios create opportunities by going from the grain.\”
Newman said the important thing to managing many of these potential outcomes would be to start with an asset mix that reflects your base-case expectation, but also hedges against it. The mix should also be flexible enough to sit in unfolding events.
\”It really is dependant on diversification,\” Sewell said. \”You need to plan for different outcomes.\”
To do this, he constantly reassesses the steady flow of information that may support or detract from the particular viewpoint.
\”It\’s an account balance,\” he explained. \”You have to make regular judgements concerning the probability of your probably outcome playing out.\”