Recalibrating Risk: Why perspective and investment priorities matter during periods of uncertainty

It wasn’t long ago that the main source of uncertainty for markets came from the COVID-19 pandemic and its impact on the global economy. A lot has changed in recent months: Not only is the global economy dealing with the Russia/Ukraine conflict, but it’s also coping with record-high inflation levels, high commodity prices, and surging COVID infection rates in China that have put much of that country’s economy into lockdown.

Those risks can be a reminder of why it’s important to keep a sense of perspective and have a plan in place when it comes to investing.

In April, TD Wealth held an event that brought together some of the bank’s top investment thought leaders to discuss the current state of global markets, the potential risks and opportunities, as well as the implications for your portfolio.

We’ve compiled highlights of that discussion here. Those hoping to make sense of recent global developments may find some added perspective can help during periods of uncertainty.  

The investment landscape has changed

“I think that we’ve experienced a handful of shocks that are likely to change the environment for a long period of time,” said Michael Craig, Head of Asset Allocation and Derivatives, TD Asset Management Inc. (TDAM).

“It’s requiring investors to recalibrate what they think about the world. Before it was about what the Fed was doing. Now it’s more the geopolitical aspect and commodity aspect that is far more important,” he said. “It’s been a pretty crazy start to the year.”

This sentiment was shared by Brad Simpson, Chief Wealth Strategist for TD Wealth, who added that there seems to be a lot of fear in the markets right now. “On a daily basis, hearing about the conflict, and then of course inflation and interest rates going up…. It really starts to increase anxiety levels,” he said.

Interest rates are still going up, but likely at a faster pace

“Historically, we were used to quarter point [hikes],” said Craig. “Now we’re going to be seeing 50 [basis points] meeting after meeting. They want to move rates above the neutral aspect. What that means is we will likely see rates north of 2% by the end of the year. We’re going to have to see how the economy handles it,” he added.

Craig also pointed out that the impact of higher rates may be more dramatic now than in years past. “Because there’s a lot more debt,” he said, “these hikes can really slow down growth a lot more than in the past…. Right now, it’s a very hawkish Fed. The most hawkish since I’ve been managing money.”

Oil prices were primed for a surge, even before the Russia/Ukraine conflict

“Today, we are sitting in an environment where underlying inventories are tight,” said Hussein Allidina, Head of Commodities, TDAM.

“There’s very little spare capacity. We don’t need the disruptions that we’re seeing on the heels of Russia and Ukraine,” he said. “When inventories are tight you have higher volatility. And I think the commodity price outlook is favourable. But I’m not sure that’s a great thing for the world.”

Allidina also says one of the challenges facing the oil industry has been years of underinvestment. And he believes that under the right conditions, crude could climb to as much as US$180 per barrel. Not necessarily in the next few months, but possibly during the next few years.

When markets turn volatile, having perspective is key

Even with oil currently hovering around US$100 per barrel, Allidina says it’s important to put the price movement in historical context.

“One metric I like looking at is the oil burden, [which is] how much we are spending as a percentage of GDP. And today, even though oil prices in nominal terms are elevated, in real terms we are still well off the highs we saw in 2008, 1979, and 1974. In oil burden terms, we are sitting at 4.5% or 5%. That number would have to get north of 6% [to be comparable],” he said.

Allidina says that as long as the global economy continues to grow, there’s a good chance the price of oil will as well.

The volatility is being felt beyond commodity markets.

“It’s going to be a messy 12 months, maybe 24 months,” said Craig. “The key thing here is not reacting to that, [and not] making an error that impairs long-term wealth creation. You’re going to get headlines, [and there] might be a tough quarter here and there, but keeping the focus on what you’re trying to accomplish is critical.”

That’s why Craig said it’s important to focus on quality companies, especially during times of volatility.  “These are the survivors and the outperformers,” he said, “quality businesses that can withstand what will be volatile…from a revenue, business and financing perspective.”

During periods of uncertainty, some opportunities may be found

“We like Canadian equities, which have been laggards for a long time,” said Craig. “And we see the Canadian market as one of the beneficiaries of what’s happening right now — energy, natural gas, materials, chemicals. So that is one area on an equity allocation we like a lot.” Craig also adds Canadian banks to that list as they stand to benefit from the rise in interest rates.

Simpson says there may also be opportunities in the so-called alternative space, which includes real estate infrastructure in Canada and abroad. ”We’ve gone into this environment of a global crisis, and that of [the conflict in] Ukraine. We were already having insufficient physical spending, moving towards greater spending in infrastructure,” he said. “At the end of the day, one of the costs is that you’re going to have to go out and rebuild what was taken apart.”

He also says the economy appears to be working the way it should, which may bode well for equities. 

“While there is a certain amount of darkness, at the end of the day, people continue to function in the economy,” he said. “We continue to move. We buy things. We buy services and products. And I think the net result of that is we continue to be at a modest overweight in equities. While we think it might not be the sort of returns we saw the last couple of years, there’s still opportunity for modest returns.”