Hunkered Down

Plenty of conversations with clients this week so far and a broad range of discussion topics, here are a couple of them:

1) "Am I going to be O.K.?" (from an 80 plus years young client, currently under lock-down in her retirement community).

With a Wealth Forecast that took into consideration her financial needs for cash flow and a more fixed income oriented strategy (light on equity market exposure) that created an annual income stream and with plenty of cash in the portfolio to weather financial market disruptions: Absolutely and resoundingly: Yes!

2) "With the prime rate down 1% and borrowing room in my LOC, is it a good time to be putting more $ into my investment portfolio (from my LOC) to take advantage of lower prices?"

That is more complicated. There are opportunities out there. With the Bank of Canada buying bonds and putting a bit of a floor under the corporate bond market, Paul (probably one of the most knowledgeable bond managers in Canada) suggests there are really good opportunities to add yield to your portfolio: 

"With the cost of funds having declined (and may likely decline again) the yields on higher-quality bonds higher, yes now may be the time to borrow and invest in income flowing bonds. In fact we are talking to a few clients and prospective clients about doing this. However, leverage is very risky and requires a full understanding of how it works to the upside and downside."

If you can borrow at 3-4% and get somewhere in the vicinity of 10% in annual bond coupon interest, there is a tidy spread to be had and the interest on the borrowed $ is tax deductible. Remember that as long as the companies meet their obligations, the bonds mature at their issue price. If you can get them at a discount to the issue price (below $100), there is some potential for capital appreciation too. Obviously, in times like these there is greater risk that companies default, but with the monetary and fiscal stimulus being added by the Bank of Canada and the federal government, this risk is being reduced.

This strategy is not for everyone and should only be part of a strategy that is managed by a seasoned portfolio manager with a high degree of expertise and dependent on your financial circumstances, time horizon and tolerance for risk. We can help you make that determination.

 Should you be loading up on stocks with borrowed money?

There is plenty of uncertainty in the world: We all have one eye on the Coronavirus stats, trying to get a sense of when this might peak and the economy can start back up again.

In the meantime central banks and governments are providing plenty of stimulus and liquidity. 

My defensive minded nature (yes that is me in the above photo, I played that position for 51 years) tells me that much of the price action in stock markets right now is short-term trading, driven by algorithms and computer generated. The blow-out in stocks forced a lot of the "leveraged" holders out. Long-term investors, passive strategies for the most part, are still holding on. If they start to get unnerved, that could be enough to force another move lower in stock markets. The computers will jump on this and try to take advantage of the downward momentum.

That may happen when we start to see the huge drop in the economic data. So far and it is still early going, the data for March has been weaker than expected. This could get a little scary as we try to determine if the stimulus packages are enough to offset the economic weakness.

It is all about confidence. If confidence, which has virtually vanished, returns, the economy could bounce back quickly. However, only a slowing of the Coronavirus stats will be able to do this and that is one big wild card.

Our strategy for buying into equity markets (as we have been under-weight our target allocations in this asset class) is to gradually layer in small percentage equity weights to the Global Equity Model to gradually reduce our under-weight allocations.

We continue to be hunkered down and defensive minded (until otherwise convinced). With plenty of ammunition.