Marc Christopher Lavoie and Robert Brunelle are contrarian equity investors, so naturally with the US market close to a record high they are taking a defensive stance. The problem is traditional defensive stocks are expensive too.
The pair are among the co-founders of equity fund manager Hexavest, which is known for its contrarian, macro approach. Christopher Lavoie is portfolio manager and Brunelle senior vice president.
To establish a defensive position in the current market they are relying on cash and gold mining stocks.
Christopher Lavoie says: “A normal defensive position would mean adding utilities, telcos and healthcare. But they are expensive. We think gold miners will give you a return in a down market.
“A lot of fund managers are wary of investing in gold companies because of some poor corporate history. Our view is that they are much more disciplined in their approach to capital expenditure and their management outlook these days.”
Hexavest’s exposure to gold miners is through a VanEck gold ETF, the GDX, which provides exposure to a number of global gold mining stocks, including Newmont, Barrick Gold Corp, Newcrest Mining, Franco-Nevada Corp and Wheaton Precious Metals Corp.
The locally listed version of the VanEck fund is up 56.3 per cent over the 12 months to September.
The main reason Hexavest has a defensive setting is its concern about high corporate debt levels, particularly in the United States.
Brunelle says: “BBB-rated debt securities and some junk issues have negative rates. Is that the start of a bubble? There are some names in the US with very large debts.
“If they get downgraded from investment grade to junk they would be sold out of portfolios whose mandates requires them to hold investment grade debt securities. That could start a cascade.
“We see that as a risk. After the financial crisis everyone expected to see significant deleveraging. That did not happen in the corporate sector.”
It has been a tough market for contrarians. Christopher Lavoie says: “Our game plan for 2019 was that the global economy would slow and that we would revisit market lows.
“We were right about the economy slowing but not about the market going down. That is because of the rate cuts, which brought back animal spirits.
“When you look at market returns, it is all about multiple expansion. There is no profit growth in markets year on year. Bad news has meant lower rates and more juice for stocks.”
Apart from goldminers they seem some pockets that look attractive. They are moving into energy, materials and banks.
They also like emerging market economies that are in the Chinese economic sphere, such as South Korea.
Christopher Lavoie says: “If the trade war intensifies the Chinese government can do things to help the country’s economy. If there is a trade deal it will help China and its trading partners.”