I use a top-down investing method. I analyze global markets, specific market sectors and individual stocks from a big picture point of view. My first step is to determine the world economy’s health. I spend time analyzing not only the developed countries but also emerging market countries. A quick way to determine an economy’s health is to look at gross domestic product (GDP) growth over the past few years and the estimates going forward
The next step is to do a more in-depth analysis of the economy along with the stock market’s health in particular. By examining the economic numbers such as interest rates, inflation and employment, I can determine the current market strength and have a better idea of what the future holds.
Living in Canada, I have learned that money has no flag and no country. It moves around the world persistently looking for higher returns. In three short years, the Canadian dollar has done from $1.05 to $0.86 when compare to the U.S. dollar.
My preliminary investigation is to follow the flow of money which is going into the U.S. dollar. The Euro Zone is still using QE (Quantitative Easing – money printing) to lower the value of the Euro and Japan is also using QE to lower the value of the Yen. The U.S. has stopped QE and there is some speculation that the Fed may raise interest rates sometime in 2015. I think the best place to invest is still the U.S.
What Sectors to Do I like
- As mentioned in a previous blog post, due to falling oil prices I like the transportation industry and consumer discretionary companies. They will benefit the most from lower fuel costs.
- The baby boomer generation (me) are getting older and will be spending more money on health care and joint replacement parts like knees & hips. A good sector to be in for long-term.
- The technology sector still has a lot of growth potential, companies that provide products and services to corporations could benefit the most. Corporations still have a lot of cash on their balance sheets which could be spent in 2015 on upgrading their systems.
- Small cap companies over the long-term outperform large cap. There are many hidden gems that Wall Street analysts do not follow. It requires a lot of your time researching but could be very profitable. The majority of today’s large cap companies were at one time or another a small cap. You could simply by a small cap ETF.
- I have a love – hate relationship with the banking industry. I hate their fees, their business practices and their greed that caused the great recession. They are not all bad so I do love their dividends and growth prospects. There are some Canadian banks that are listed on the New York stock exchange that have branches in the U.S. and have a higher dividend yield than U.S. banks. (Ticker symbol TD, RY,BMO)
What to Avoid
- While I am a big believe in asset allocation and diversification, where are times when these strategies fall short in protecting your wealth. I no longer hold any bonds in my investment portfolio. The bond market is in bubble territory. French & German ten-year bonds are yielding less than 1%, even Italian bonds are below 2% while the U.S ten year bonds have a yield under 2.5% ! The high yield bond market is yielding around 5% with a high degree of default risk. The rate of returns on bonds are way too low and the risk is too high if the U.S. raises interest rates.
- I find that the price of gold and gold stocks are too difficult to figure out. There are just too many conflicting factors. Inflation fears, crisis situations, used as an alternate currency and central banks purchases can all affect the price of gold. I avoid investing in a market that I don’t understand.
- The basic materials sector relies heavily on infrastructure spending but governments worldwide have huge debt problems, even China has reduced spending in this area. However, this sector also includes chemical producers and forestry products. Some of these individual stocks could be okay to buy.
- The energy sector has an oversupply problem. Some oil companies will continue to supply oil because they have future contracts at higher prices. Oil producing wells from fracking have a fast depletion rate so it could be better to lose some money than lose the oil. Things could change quickly if Saudi Arabia cuts production.
One of many investing mistakes that I made when I was young was “Herd Mentality” – the herd is running to the U.S. I am going to protect my portfolio by keeping some of my money in Canada plus look for some investment opportunities outside of North America.
Now it is time to do some in-depth research on the sectors that I like. I like looking at long-term charts to confirm a uptrend. I then look at a one year chart and moving averages to determine entry and exit points.
Disclaimer: I have a degree in economics so my investment approach is somewhat bias. The information is only my opinion and for discussion purposes only. Do your own research or consult with an investment professional before you invest.
Your comments are welcome, even if you disagree with me.