Not all banks are facing a liquidity crisis, although some may be trading like they are
Published Mar 27, 2023 • Last updated 21 hours ago • 3 minute read
Traders working on the floor of the New York Stock Exchange. Photo by Spencer Platt/Getty Images files Everybody loves a good story, and the more extreme the view, the more attention it will get.
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Access articles from across Canada with one account Share your thoughts and join the conversation in the comments Enjoy additional articles per month Get email updates from your favourite authors Today’s environment is no different, with calls for doom and gloom and a return to the days of ultra-low rates and quantitative-easing-fuelled markets.
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In a recent David Rosenberg podcast, well-known British investor Jeremy Grantham warned us to brace for a whopping 50 per cent crash in the S&P 500, because the implosion of the everything bubble will be “pretty damn big,” even dwarfing the 2000 dot-com correction.
But being so negative has proven to be a losing proposition in the long run. History has provided plenty of evidence showing that the winning bet is on humanity overcoming challenges instead of against it.
Investing requires having the fortitude to be a contrarian, to look for ways to make money in all kinds of markets, and this is made that much easier following corrections. This is no easy task, however, especially if your portfolio is down and the headlines are filled with the-world-is-ending predictions.
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Article content Now, that doesn’t mean you need to completely ignore risk and go all in, as those who have been buying speculative tech and meme stocks are once again doing. Why expect otherwise when we’re told to expect exponential and “super-exponential” growth in the years to come, as infamous tech guru Cathie Wood recently put it.
But here is a novel idea: how about owning companies that are reasonably valued, have a solid business model with protective moats from competitive threats and can generate strong free cash flow and earnings even in a higher interest rate environment?
Why is no one talking about this, and why does it have to be own nothing and go to cash because interest rates will destroy the market? Or go all in on long-duration equities on the expectation that interest rates will fall back down as the United States Federal Reserve capitulates?
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Article content Instead, we have the current situation where oil stocks are strangely selling off with a near-perfect correlation to bank stocks. You have investors defensively positioning in speculative tech and cryptocurrencies. And you have some selling all their positions and buying gold and money market funds on fears that this is another 2008 event.
Such a binary approach is creating plenty of opportunities for those willing to step away from the noise.
The bottom line is that one can actually own some growth again, but at much lower levels than their euphoric 2021 highs. Forget the exponential-growth nonsense, but target those companies that have access to capital and can still generate double-digit annual recurring revenue growth even in this tougher environment while concurrently managing operating costs.
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Article content Banking crisis buying opportunity for brave investors Investors need to centre themselves as interest rates stay sticky 3 factors that will hurt the Canadian dollar for years to come Also, not all banks are facing a liquidity crisis, although some may be trading like they are. How about dipping your toes in value by looking at those traditional U.S. banks that are in a strong financial position and able to take advantage of the ongoing turmoil to steal market share and grow their client base? How about owning some of the Canadian banks that have sold off alongside European and U.S. banks?
Oil and oil stocks are not troubled bank stocks and supply-and-demand fundamentals will eventually win the day. What about looking at energy companies that are generating a record amount of cash flow even in a flat oil price environment, cash that can be used to expand dividends, pay down debt and buy back shares?
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Interest rates will move higher, stay flat or even possibly move lower, so your portfolio should focus on those positions that can prosper in all three scenarios, not just one.
This good old-fashioned approach may seem boring, but it is consistency that matters when playing the long game. That may not be headline grabbing or as exciting as speculating on low-probability binary events, but you don’t need either to make money.
Martin Pelletier, CFA, is a senior portfolio manager at Wellington-Altus Private Counsel Inc, operating as TriVest Wealth Counsel, a private client and institutional investment firm specializing in discretionary risk-managed portfolios, investment audit/oversight and advanced tax, estate and wealth planning.
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