5 big picture investing themes and how to play them

Peter Hodson: Here are five themes right now that an investor could work into a portfolio

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Choosing the right stocks to own can be very difficult. There are always reasons not to buy, and stocks in general have risks, of course. The average stock actually declines. Markets still go up, over time, though, because the stocks that rise more than make up for those that decline.

Still, we understand that investors at times want to stop buying stocks altogether and just buy a market exchange-traded fund and forget about the whole thing. This can be a very good strategy. But what about those who want to keep choosing their own stocks? We say go ahead. But if you do, keep the big picture in mind.

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What to do, then? There is, perhaps, still a way to tilt a portfolio of stocks in your favour. You still have to select the right securities, of course, but if an investor looks at the big picture, they may be able to outperform a portfolio of stocks that simply picks good companies without considering the macro environment.

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In other words, if you get the stocks right and the macro right, you have a better chance to outperform. So, with that, let’s look at five themes right now that an investor could work a portfolio into, if they so choose.

Artificial intelligence

Most investors these days are scrambling to invest in actual AI stocks. But not so many investors are focusing on the benefits of AI to other companies. Unfortunately, for workers, the biggest benefit to companies is efficiency and productivity. With targeted AI spending, companies on average are going to need far fewer workers.

AI solves a big problem for companies. Good workers are still very hard to find, and if companies can reduce hiring, cut costs and increase margins through AI, they are going to do it. The market, of course, is driven by profits, and lower costs will equal higher profits. The industrial and health-care sectors might be big beneficiaries here. The big picture play is to look at other sectors when considering AI, not just tech.

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Canadian dollar

Without getting into the reasons (which would be a whole other article), the Canadian economy is a bit of a basket case right now. Debt is high, productivity is low and we are far more likely to enter a recession than the United States is. The result: most investors (and we would agree) expect the Canadian dollar to continue to decline against the U.S. greenback.

The big picture play: Tilt a portfolio more towards the U.S. If markets rise, say, six per cent over the next year, a three per cent positive-direction move in currencies would get the total return up to a pretty decent return — if it were to occur.

Demographics

The Japanese market has finally broken out, but it was in the doldrums for 35 years. There were lots of reasons for this, but demographics was certainly one. As a population gets older, it spends less. Less spending equals less profit for companies. This angle doesn’t even consider the cost to governments of an aging population, including lower contributions to pension plans and much higher health-care costs.

None of this is new. But with Canada’s population growth, it is being largely ignored, for now. But the U.S. population is aging, and Canada has already taken steps to slow down its population growth.

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The big picture play: Keep an eye on sector weightings. Health care might start to perform better as we age. Also, despite lacklustre performance over the past decade, do not forget to look at international markets, where valuations, growth and demographics might be much better than in North America. African countries, on average, currently have the youngest average population age in the world.

U.S. debt

It seems that every year in the past 40, someone, somewhere, expresses concern about U.S. debt levels. And why not? Right now, U.S. debt is US$34 trillion. Many pundits believe this is not sustainable, and, one day, the U.S. dollar is going to pay the price.

We agree it may be an issue, but the U.S. remains the safest and strongest capital market in the world, and the U.S. dollar, until something better comes along, is still what investors flock to in times of crisis.

The U.S. market this week broke its record for its highest-ever exposure to overall global capital markets. But if one believes U.S. debt is unsustainable, then the big picture play is to own at least some gold, or gold stocks. Gold, as they say, cannot be printed. As a reserve currency, it still beats bitcoin. Interestingly, gold broke out to all-time highs this week.

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Real estate

It is now cheaper to rent than to buy in many cities. The free money days for borrowers are over, and this is resulting in real estate weakness. Commercial real estate has never recovered from COVID-19, and vacancies are at historical highs. This is causing repercussions in many sectors, from banks to real estate investment trusts.

Yes, lower rates (if they ever occur) could help some of these concerns. But keep in mind that there is always the possibility of recession as well. Also, rates are not likely to decline anywhere near as fast as they rose. Many companies, and possibly banks, may continue to struggle.

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How to play this? Well, for starters, we would keep an eye on your overall real estate exposure. Many investors tend to forget that while the S&P/TSX composite index only has a 2.2 per cent weighting in real estate, if they include their house in the equation, their own real estate exposure might be 65 per cent or more. The S&P/TSX financial sector is at 30.5 per cent weighting today, and maybe half of that, or at least 10 percentage points (business-wise), is likely tied somehow to real estate.

The big picture play here is to watch your overall exposure to real estate and financials. If you own your own house, do you really need to own any real estate stocks?

Peter Hodson, CFA, is founder and head of Research at 5i Research Inc., an independent investment research network helping do-it-yourself investors reach their investment goals. He is also portfolio manager for the i2i Long/Short U.S. Equity Fund. (5i Research staff do not own Canadian stocks. i2i Long/Short Fund may own non-Canadian stocks mentioned.)


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