Donald Coxe’s recommended investment strategy

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When it comes to evaluating how well people “read” the macro picture of financial markets, it is important always to distinguish between skill and luck. And it is really only with the passing of time, or evolvement of a number of market cycles, that one can separate the wheat from the chaff.

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Donald Coxe, Global Portfolio Strategist of BMO Financial Group, is one of a select group of analysts that have been remarkably right on the “big picture” outlook for many years. My market views essentially concur with Donald’s investment recommendations as published in the February edition of Basic Points (courtesy of J’s Global Analysis). I have therefore deemed it opportune to share his words of wisdom with you in the paragraphs below, especially also in the light of the difficult juncture in financial markets.

1. Long-term investors should remain heavily overweight commodity stocks, including the base-metal stocks. As the bear market grinds on, use days of stock market weakness to add to commodity stock exposure. They not only remain the asset class with the best earnings outlook, but also the asset class that is least understood by conventional asset allocators, who still see them as cyclicals dependent on OECD growth.

2. In the near term, the golds will continue to outperform stock markets and to act as a form of hedge against two kinds of shocks – financial panics and inflation shocks.

3. Remain heavily underweight bank stocks, and financials tied to “Jurassic Park Avenue” excesses. Within the financial group, overweight high-quality fire and casualty companies, life insurers, and asset management organizations.

4 Retain above-average cash positions, preferably in strong currencies.

5. Where possible, borrow in dollars and invest in assets denominated in strong currencies.

6. The Canadian dollar remains the Western currency with the best fundamentals. Canada’s problems arise because the Great Lakes are an insufficient barrier to the flow of bad economic and financial trends from the South.

7. Within the commodity groups, continue to emphasize investment in companies with long-duration unhedged reserves in the ground in politically secure regions.

8. The growth of sovereign control of energy assets means that the supply-side response to record-high oil prices will probably be inadequate to meet relentlessly growing global demand. Too many Third World governments with rich oil reserves have too many other demands for cash to reinvest heavily for the long term in new production. Retain exposure to the shares of producing Alberta Oil Sands companies with reserves that could outlast this century.

9. Long-term-oriented investors should use any temporary pullback in base metal producers to build their portfolios for the Final Movement of the Sonata – which will be the longest and loveliest performance of metal music in history.

10. The Treasury yield curve is now in recession mode – low yielding and upward sloping. It is of investment merit only for those who expect a long, deep recession. The Ten-Year note, with a negative real yield of 50 basis points, should appeal only to those who believe the recession will be accompanied by deep deflation. Oddly enough, credit spreads, though they have widened from their record-low levels, do not discount any recession at all.

We think bond investors should go for short- and medium-term high-quality non-Treasury paper – preferably in currencies other than greenbacks.

11. Defence stocks remain attractive, even if Democrats win it all in November. The next president may well choose to speak more softly than the incumbent, but if he or she doesn’t carry a big stick, the jihadists won’t listen.

As an added bonus, click here for Donald’s most recent webcast, dealing with the case for commodities and resources stocks.

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5 comments to Donald Coxe’s recommended investment strategy

  • Donald Coxe’s recommended investment strategy…

    Donald Coxe, Global Portfolio Strategist of BMO Financial Group, is one of a select group of analysts that have been remarkably right on the “big picture” investment outlook for many years. His recommended investment strategy therefore makes for ap…

  • Hi,

    I think (and I’m trading :-) that in terms of fundamentals, there are several medium term concerns (long term is of course bullish) for the commodity bulls because the supply/demand equation is probably going to be change:

    1) In a global recession environment, it is almost sure that global demand for commodities will be affected, even in the miraculous China, that is almost 40% dependent on exports. The only question here is how severe is going to be this recession, now predicted by more than 50% of economists;

    2) There are also issues on the supply side of the equation: a lot of production capacity increase plans has been started in the last 2/3 years but the effects are only starting to be felt lately because those plans take time to accomplish: you don’t start to extract gold or crude oil the next day you decided it. There is a significant lag of time between that decision and the day the commodity gets in the market. There are environment studies, paper-work (licences,…) and the normal time factor that huge construcion/assembly plants like an oil platform or a gold mine takes to get ready;

    3) The U.S. dollar will of course benefit from this commodity correction. Adding to the previous considerations:

    a) With the real estate bubble bursted and the credit bubble bursting, inflation will probably slow down which is bearish for commodities and, thus, bullish for the U.S. Dollar;

    b) The trade deficit – and so the U.S. Dollar – will benefit from a slowdown in the U.S. because the American consumer is and will continue to spend less in the next quarters. Exports won’t be affected until the U.S. Dollar remains undervalued;

    c) Finaly, the BOE will need to follow the FED in cutting rates to the [3%;3.5%] range and the ECB will be forced to follow them (historicaly the ECB follows the FED with a 6 to 9 months delay).

    Best Regards,

    Dax Speculator

  • Frank Wordick

    Commodity stocks have performed poorly in comparison with their underlying asset. However, since the overall market is in reverse any forward movement is welcome. The poor performance is probably due to the disbelief in stagflation or any kind of inflation taking hold. M1 and the Money Base say there will be no inflation.
    Canada is twice as big as Australia and therefore arguably safer, but it looks to me like Oz has bigger exposure to Asian commodity-purchasing markets and consequently is in a stronger position currency-wise. Oz is an island, while Canada is integrated into the US — for good or bad. Now it’s bad. The Ozzie dollar looks a better bet than the Canuck despite being more volatile. Some years ago it was worth 47 cents! Now it’s around 94 cents, which is twice as much. I remember when it was worth $1.43. The $A or AUD is very sensitive to commodity prices, particularly the hard ones.
    If the bottom falls out of the oil market like I expect it to within 5 years time, the Alberta Oil Sands business will be worth zip. Just check out what the US, Korean and Japanese auto companies are up to as well as the US government. Then there is the giant Brazilian bagasse to ethanol project plus people looking at the 2 million tons or whatever of Georgia wood chips per year which also makes decent ethanol feedstock.
    It is interesting to hear what Coxe says about getting out of Treasuries and into company bonds. I thought of that myself. However, many advisors and investors are claiming that no debt instrument is any good except a piece of Treasury paper. Also, Roubini or Dr Doom, jnr as you may choose claims that company default rates will boom to 10% when the recession goes into full bloom.
    Who should we believe?

  • Like the magazine covers analogy, the commodities surge is likely over or almost over. Take steel for example, it is just beginning a long correction althoughit has a bounce just in store just ahead, it will drop far lower than most imagine. When stocks surge again, commodities will be left behind.

    Right now there is much speculative holding keeping stocks off the market. Once it becomes clear that the downside is inevitable, those stocks will get dumped and we’ll see prices come down faster than they went up.

    Eduardo Mirahyes

    http://www.Exceptional-Bear.com

  • Samo Zain

    Hi there…Thanks for the nice read, keep up the interesting posts..what a nice Saturday

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