We have consistently held to the thesis since 2007 that the major theme in Western markets is deflation. With U.S. quantitative easing and the first rate hike of a supposed 3-4 more to come, interference in market price discovery has been reduced. The initial reaction has been a strong bid in defensive sectors, areas that are showing positive absolute and relative strength, followed by a reflective up-move in dollar-sensitive and heavily-shorted sectors. The key during the next year will be ensure a “barbell” approach to risk by adjusting the balance of asset and sector allocations. Defensive holdings, such as longer-dated bonds, utilities, consumer staples and infrastructure for example, will provide portfolios with a stable, trending core, while more pro-cyclical areas such as energy, industrials and technology need to be strong individual securities (sector outliers) or the sectors must be bought on weakness for a rental. Spreading out risk in this way, combined with active management, will support positive absolute returns one year from now.
Continue Reading on The Globe and Mail