Last week we were fortunate to have Kevin Headland, Co-Chief Investment Strategist from Manulife Investments come to our office from Toronto for a one-on-one discussion about the general state of the economy, current opportunities, and an update on the US banking situation.
Kevin is a key resource for our firm who provides insight on the overall economy and where investment opportunities lie. He and his team do an incredible amount of research and analysis into historical market performance and current conditions.
The failure of the Silicon Valley Bank (SVB) made major headlines and caused widespread fear amongst individuals. While this failure put strain on other institutions and dampened markets, this is not a repeat of the 2008 financial crisis. Simply put the failure of the SVB comes down to poor risk management. They were highly leveraged and the limited collateral or security they held would have to be liquidated at big discounts to cover the large withdrawals given the current interest rates. SVB also attempted to raise additional funds through the sale of more shares, however SVB stock price was plummeting making that attempt unsuccessful as depositors were pulling their funds. This highly leveraged bank and some of its peers in similar situations do not represent the industry as a whole, who are much more robust and cautious in their approach to lending.
When it comes to investment asset allocation there are often different opportunities in either sectors or geographic regions around the world. At present Kevin is recommending a geographically diverse portfolio without a heavy weighting to one region over another. The best opportunities are currently being found on a company-by-company basis compared to a specific region or sector.
Kevin mentioned that there will continue to be periods of volatility through the next year. It is in these periods of volatility where the active investment strategies that we implement for our clients really shine. Passive investment strategies such as buying ETFs that mirror an entire index like the S&P500 can only grow when the overall market grows. Active investment managers are investing in or selling out of companies daily depending on the opportunities the markets are providing on a given day. While volatility can be concerning to see within your portfolio, it does provide opportunity to set your investments up for longer term prosperity.
In earlier blog posts, we heard from both Francis Donald, and Kevin Headland & Macan Nia together that the end of interest rate increases are near. Historically this has provided opportunity in both the bond markets and the stock markets. Based on previous market cycles, one year after the US Federal Reserve pauses interest rate increases the S&P500 Index returns over 16%. While historical data cannot perfectly predict the future it can provide indication that there is a light at the end of the tunnel for equity markets.
BBA, QAFP™| Advisor